CML - Time Spread Opportunity

Discussion in 'Options' started by livevol_ophir, Sep 21, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    CML is trading $18.02.

    <img src="">

    I found this company using a custom real-time scan I developed on Livevol Pro. The details are included below:

    <b>Time Spread Scan Details</b>
    Stock Price >= $5
    Avg. Option Volume >= 1500
    Industry != Bio-Tech
    Sigma1 - Sigma2 >= 7
    Sigma1 >= 1
    Sigma2 >= 1
    Days After Earnings <= 10 >= 70

    Lets take a look at the Skew Tab first (<a href="">in the article</a>). In this case, I'm interested less in the shape of the skew than a simple graphical representation of the vol diffs ATM.

    I've highlighted the month to month vol difference. The company had earnings 7-28-2010 AMC, so a reasonable projection is that the next earnings release will be after Oct expo which is 10-15-2010. That means a time spread not only buys low vol against selling high vol, but it also gets the benefit of buying a vol event (earnings).

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

    It looks like with some reasonable liquidity an Oct 17.5 straddle could be sold @ $3.05 while the Nov 17.5 straddle could be purchased for $4.60, or a total of a $1.55 debit. Keep in mind, time spreading by purchasing the back is long vega. That means a takeover will likely be a large loser. The ideal situation here is that CML pins on the strike at Oct expo, yielding a cheap long straddle in Nov with an earnings event. The worst case scenario is a large move away from the strike pre Oct expo. A rise in vol without a stock move is also a winner.

    A few other things to note.
    IV30&#8482: 84.22
    HV20&#8482: 100.80
    HV180&#8482: 76

    So this stock moves pretty big and both the 86 vol sale (Oct) and 79 vol purchase (Nov) are substantially less than the recent short term realized vol. A Nov ATM straddle purchase in and of itself looks somewhat reasonable.

    This is trade analysis, not a recommendation.

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

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