BRCD - Scalping the Skew For a Small Bet

Discussion in 'Options' started by livevol_ophir, Nov 19, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    BRCD is trading $5.80, up small with IV30™ up 2.2%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/11/brcd.html">in the article</a>.

    <img src="http://www.livevolpro.com/help/images/blog/brcd_summary_11-19-2010.gif" />

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    I posted an article on this reverse skew on 9-7-2010.
    <b><a href="http://livevol.blogspot.com/2010/09/brcd.html">Brocade (BRCD) - Stock Up, Vol Pops &amp; Skew Goes Backwards on Takeover Rumors</a></b>

    Today Cathy Clay of the Livevol Strategy Group pointed out that the Dec 6/7 call spread is going for crazy cheap (in my opinion) in a takeover stock with earnings in the Dec cycle. Let's look to the Skew Tab first (<a href="http://livevol.blogspot.com/2010/11/brcd.html">in the article</a>).

    So the Dec 6 calls are priced at 53.5 vol and the Dec 7 calls are priced at 68 vol. Even better, BRCD has earnings in the Dec cycle and the 6 strike is the ATM. The cherry on top?... The markets are a cab ($0.01) wide.

    The Options Tab (<a href="http://livevol.blogspot.com/2010/11/brcd.html">in the article</a>) illustrates the prices.

    <b>Possible Trades to Analyze</b>
    1. Buying the Dec 6/7 call spread for $0.17 seems like the bet here. It's a small bet with a MaxGain:MaxLoss of 4.89:1. It scalps skew in a call spread, trades on tight markets, buys earnings vol ahead of the rise and has the added benefit of a possible takeover (or takeover rumor).

    The fact that it's this cheap actually implies the likelihood of the stock going to $7 is pretty low... Just to temper expectations...

    This is trade analysis, not a recommendation.

    <b>Follow Live Trades and Order Flow on Twitter: @Livevol_Pro</b>

    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/11/brcd.html">http://livevol.blogspot.com/2010/11/brcd.html</a>

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