Backspreads/Front Spread/Directional Butterflies with Large Short Interest Stocks

Discussion in 'Options' started by deltahedge, Jul 14, 2011.

  1. Hey ETers

    I'm just trying to figure out the appropriate scenario for each of these option strategies. As a guy with a reg-T margin account I get far more margin relief through directional butterflies than for front spreads (+1X-2). In portfolio margin, however, these front spreads seem far more appealing than directional butterflies given the possible credit that can be harvested relative to the directional butterflies (especially on the downside and selling expensive vol skew).

    I'm currently looking at a couple of large short interest candidates (i.e. LULU, GMCR, FSLR) to name a few and am thinking of implementing some of these strategies either in the front month or possibly in the back months as earnings draws near and also on a longer term basis given their relatively absurd valuations. With most of these names IV is fairly elevated (80%+) so it's fairly certain movement will happen one way or another in the month(s) to come.

    If anyone can point in me the right direction regarding how to play stocks with such large short interest or possibly which resources could shed light how to correctly assess and determine which strategy to implement that would be great.

    Thanks in advance :)