CTB - Huge Upside Bet Crosses the Tape

Discussion in 'Trading' started by livevol_ophir, Apr 21, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    CTB is trading 20.63.

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/S88b4A_VBiI/AAAAAAAAB6s/Mn653lwAQzc/s1600/ctb_summary.gif">

    The company has traded over 10,000 options in the first two hours on total daily average option volume of just 381 and it's essentially, one huge bet. The Stats Tab and Day's biggest trades snapshots are included (in the article).

    The Options Tab (in the article) illustrates that the calls and puts are all opening (zero open interest).

    <b>What's the trade</b>
    It's a Jun 20/22.5 1x2 risk reversal. Or, in English:
    Buy 7,000 Jun 22.5 calls for $0.65 and fund that by...
    Sell 3,500 Jun 20 puts @ $1.05 for a total cost of $0.125 x 7,000.

    This gets super long with the calls and even longer by selling the down sideputs (which are only $0.63 out of the money).

    Total Cost = $0.65(7000)(100) - $1.05(3,500)(100) = $87,500

    The PnL chart and stats are included (in the article).

    If the stock stays put, the bet loses $87,500. If the stock moves up or down substantially, it turns into a multi-million dollar result. Sometimes you can see this type of trade (called a risk reversal) on the other side. i.e. Getting short deltas. This can either be a short bet or a long stock holder hedging but saving premium by selling the upside. In this case though, it seems like a bet, unless someone is short a bunch.

    The stock has traded fairly active. Over 860,000 shares on total daily avg. volume of just over 1 million. This trade could be done with stock. The PnL chart and stats are based on no stock hedge.

    Finally, the Charts Tab (6 months) is below (in the article). 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.

    Basically the stock hasn't done a whole lot - certainly not to the upside.

    This is trade analysis, not a recommendation.

    Details, vols, prices, pnl here: