CBG - Risk Reversal and a WHAT!?

Discussion in 'Options' started by livevol_ophir, May 20, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    CBG is trading 14.22 with IV30&#8482 up 19.7%.

    <img src="http://1.bp.blogspot.com/_hMry1m7UF10/S_V2SNkthZI/AAAAAAAACfA/BMMFJ2E9Q7g/s1600/cbg_summary.gif">

    The company has traded over 45,000 (not a typo) options on total daily average option volume of just 1,452. over 38,000 Sep 17.5 calls have traded. The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/05/cb-richard-ellis-cbg-calendar-risk.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/05/cb-richard-ellis-cbg-calendar-risk.html">in the article</a>) illustrates that the Sep 17.5 calls are opening (trade size >> OI). The Jun 15 puts are opening as well.

    The two largest trades are confounding when taken together.
    1) Sell 3,450 Sep 17.5 calls @ $0.85, buy 3,450 Jun 15 puts for $1.60.
    This is just selling calls to fund a put purchase. It's bearish, long vol and premium positive (costs money).

    2) 32,200 Sep 17.5 calls traded $0.80 vs. $0.60 x 0.95 market. Hypothetically, since mid market is $0.775, then $0.80 is more likely a purchase. So that would make this the opposite side of the first trade in these calls (sell in the first, buy in the second).

    Since the options traded so large and so "mid-market", it makes sense that they must have traded with stock. See the stock stats (<a href="http://livevol.blogspot.com/2010/05/cb-richard-ellis-cbg-calendar-risk.html">in the article</a>).

    With two hours to go in the market, the stock is certainly more active than average, but not to account for the 32,000 lot. At 31 delta (see options tab above for that number), that's 32,000,000 * .31 = 9,920,000 shares for a fully hedged trade. Even on half a hedge, that's more stock than has traded.

    What am I getting at?... I think that might be a mistake from the exchange. Why would a market maker sell 32,000,000 calls and hedge zero? Further, if he was to do that, why would he not demand more edge? I mean, $0.025 to be short 32,000,000 shares above 17.5?... Really?...

    Having said that, I actually don't know. The first trade, which turned out to be ~3,500 Jun/Sep risk reversals makes sense for a bearish bet, getting long puts but covering up some of that naked vega with call sales. That trade is the opposite trade made earlier this morning in VRSN (that blog is available <b><a href="http://livevol.blogspot.com/2010/05/vrsn.html">HERE</a></b>) which sold a strangle (naked short vega).

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/05/cb-richard-ellis-cbg-calendar-risk.html">in the article</a>) offers more evidence of a possible mis-print from CBOE.

    A picture paints a thousand words... You can see the Sep 17.5 calls are lower vol than the other months. That makes sense for the first trade (sell Sep buy Jun), but makes less sense if there was an actual 32,000 lot purchase afterwards.

    Finally, the Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/05/cb-richard-ellis-cbg-calendar-risk.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    The IV30&#8482 (red line) is rising (as with most stocks), as the stock has dipped (also like most other stocks).

    This trade (the Jun/Sep risk reversal) is a nice counter to the earlier post on VRSN. As I said before, now could be a good time to trade if you have conviction. Vol is either high or low, I don't know many people that think it stays here throughout summer. Then again...

    This is trade analysis, not a recommendation.

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