CSTR - Earnings Preview and Elevated Vol

Discussion in 'Options' started by livevol_ophir, Oct 26, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    CSTR closed at $47.00 yesterday, down 1.0% with IV30™ up 6.2%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/10/cstr.html">in the article</a>.

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    The company has earnings in two days BMO. Yesterday, the company traded over 17,000 options on total daily average option volume of just 3,854. The action was in Nov: Nov 50 call buyer, 55 call seller and 46 put buyer. So there is an overall premium long accumulation. The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/10/cstr.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/10/cstr.html">in the article</a>) illustrates that both the 50 and 55 calls as well as the puts are mostly opening (compare OI to trade size). We can see that Nov vol popped 4.9 points while Dec was up 2.4.

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/10/cstr.html">in the article</a>) illustrates the vols by strike by month.

    We can see the classic front month elevated vol into earnings. Other than that, the skew looks pretty nice. Looking to the stock behavior (<a href="http://livevol.blogspot.com/2010/10/cstr.html">in the article</a>) for CSTR after earnings, we can see it can move fairly substantially.

    Finally, the Charts Tab (6 months) is <a href="http://livevol.blogspot.com/2010/10/cstr.html">in the article</a>. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

    <img src="http://www.livevolpro.com/help/images/blog/cstr_charts.gif" width="600" />

    We can see a rather impressive vol divergence between the implied and either of the two historicals (short-term and long-term). Last earnings a similar patten evolved - the market is definitely sensitive to the big move potential for this stock on earnings.

    <b>Possible Trades to Analyze</b>
    The vol is high, but for a reason. Selling the ATM straddle @ $5.60 feels high given it hasn't moved more than in 7/8 earnings cycles (but those are just one day moves). I guess that's sort of fair value when looking at prior cycles through expiration.

    1. If you have a delta bet on this thing, doing the one dollar call (or put) spread for anything less than $0.50 feels like a pretty reasonable (or better than reasonable) bet. The problem is, you'd have to be right on the delta direction.

    2. The Nov 40/41 1x2 put spread (buy one 41 sell two 40) for a $0.50 credit might be a play simply on the high vol and sharp skew while essentially trying to stay out of the way of the stock move. Naked downside though...

    Other than that, I think this name is ok to trade with a delta bet and being contract neutral, playing both sides feels expensive but selling naked vol could be a touch too risky.

    This is trade analysis, not a recommendation.

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    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/10/cstr.html">http://livevol.blogspot.com/2010/10/cstr.html</a>

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