BJ - Time Spreading on Vol Diffs and Custom Scans

Discussion in 'Options' started by livevol_ophir, Sep 15, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    BJ is trading $42.32.

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    I found this stock using a real-time custom scan I built in Livevol Pro. I've included a snapshot (<a href="">in the article</a>).

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    <b>Time Spread Scan Details</b>
    Stock Price >= $5
    Avg. Option Volume >= 1500
    Industry != Bio-Tech
    Sigma2 - Sigma3 >= 7
    Sigma2 >= 1
    Sigma3 >= 1
    Days After Earnings <= 10 >= 70

    The Sigma2/3 >=1 is just a sanity check so I don't get any weird bond funds with 0.5 vol or whatever. The days after earnings makes it so I can eliminate some earnings vols from the front month, as I am looking for natural time spreads, not earnings plays (I have a separate scan for earnings).

    I have included the Skew Tab (<a href="">in the article</a>). This illustrates pretty clearly the vol diff from Oct to Dec. I've highlighted the 40/45 strangle.

    Moving to the Options Tab I can see the actual prices and possible trade.

    <b>Possible Trade to Analyze</b>
    Sell the Oct 40/45 strangle @ $1.70
    Buy the Dec 40/45 strangle for $3.35
    Net debit is $1.65.

    The Oct strangle sells 39 vol (ish) and the Dec strangle purchases 32 vol (ish). The trick here is that earnings look like they will occur after Oct 15th (expo). I see projections from Oct 18th out to Nov 17th. If this is true, this trade buys low vol with an earnings date and sells high vol without. Could be a neat trick.

    This trade loses to large moves away from the long strikes in Oct, or an absolute vol disintegration as it is long vega. So a takeover would be bad. It wins to time decay and vol increases with the stock sitting.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:

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