CMC - Vol Rising, Upside Skew Bid

Discussion in 'Options' started by livevol_ophir, Dec 3, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    CMC is trading $16.65, up 0.2% with IV30™ down 2.4%. The <a href="">LIVEVOL™ Pro Summary</a> is <a href="">in the article</a>.

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    Yesterday the stock was up more than 4% with IV30™ popping over 15.5%. The Summary from yesterday is included <a href="">in the article</a>.

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    This is a stock with rising vol and stock price. Not surprisingly, today I found this stock using a real-time custom scan that hunts for high vols.

    <b>Custom Scan Details</b>
    Stock Price &gt;= $7 and &lt;= $70
    IV30™ - HV20™ &gt;= 10
    HV180™ - IV30™ &lt;= -8
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech
    Days After Earnings &gt;=10 and &lt;=60

    The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching. The IDCC Charts Tab is included (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

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    We can see:
    IV30™: 52.98
    HV20™: 33.27
    HV180™: 42.75

    So, IV30™ is elevated relative to the short term and long term realized movement of the stock. Looking to the Skew Tab (<a href="">in the article</a>) we can see that the Dec ATM is priced ~47 vol and is substantially depressed to the Jan ATM. We can also see that the Dec upside is severely skewed up, which is "not normal" skew. Note also how the stock has ripped as of late.

    Let's look to the Options Tab (<a href="">in the article</a>).

    <b>Possible Trades to Analyze</b>
    1. Sell the Jan 16/17.5 strangle @ $1.85 or about 52 vol.

    2. #1 but cover with an upside call; the Jan 19 call can be purchased for $0.55. That yields a $1.30 credit and a max upside risk of $0.20.

    3. Buy Dec 16/17.5 call spread for $0.70. That yields a 1.14:1 MaxGain:MaxLoss ratio, with $0.65 in parity.

    This is trade analysis, not a recommendation.

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