CVLT - Vol and Earnings Trade Analysis

Discussion in 'Options' started by livevol_ophir, Oct 1, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    CVLT is trading $25.90, down 0.5% with IV30™ down 0.3%.

    <img src="">

    I found this stock using a real-time custom scan. This one hunts for high vols.

    <b>Custom Scan Details</b>
    Stock Price &gt;=$7 and &lt;= $70
    IV30™ - HV20™ &gt;= 13
    HV180™ - IV30™ &lt;= -8
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech
    Days After Earnings &gt;=10 and &lt;==60

    The snapshot of the scan is included (<A href="">in the article</a>) in case you want to build it yourself in Livevol Pro™.

    <img src="" width ="600">

    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 CVLT 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). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

    We can see:
    IV30™: ~64.5
    HV20™: 41.5
    HV180™: 49

    So, IV30™ is elevated relative to the short term and long term realized movement of the stock. Also, please do note the massive gap down in stock on 7-13-2010 when CVLT went from $23.47 down to $18.35 (close to close).

    Finally, let's look to the Options Tab (<A href="">in the article</a>).

    We can see that the Oct 26 straddle is priced at about 66 vol or a $2.65 sale. The Nov 26 straddle is priced at 63.5 vol or can be purchased for ~$4.90. Like a few of my recent posts, this is interesting as earnings are a volatility event in the Nov cycle and present a nice little cover to a possible sale.

    <b>Possible Trades to Analyze</b>
    1. Sell the Oct 26 straddle @ $2.65; very risky but a pure vol play.

    2. Sell the Oct 26 straddle @ $2.65 then buy the upside to protect for a takeover. If we look to the Skew Tab, we can actually see that the upside in Oct is bid (bent upward) creating a parabola which is not "normal." The Skew Tab is included (<A href="">in the article</a>).

    <img src="" width="600">

    Covering up the naked short upside with Oct calls is going to be expensive given that vol, so one approach is to look OTM and buy 2 assuming a takeover would come at a substantial premium to the current price. Buy 2 of the Oct 30 calls for $0.35 (each) with the straddle sale yields a total $1.95 credit and wins if the stock is taken over above ~32. The PnL chart for this trade is included (below).

    In terms of the straddle sale, this trade wins if the stock is in ($24.05, $27.95). Note this trade is still naked short the downside and this stock has gapped down before (as noted above). Buy an OTM put to cover up to the downside is an alternative also, though it eats into the credit from the straddle sale.

    3) Another alternative is to sell the Oct 26 straddle @ $2.65 and purchase the Nov 26 straddle for $4.90 (64 vol) yielding a net debit of $2.25. The added benefit is that earnings should be in the Nov cycle, a vol event in a long vega position.

    This is trade analysis, not a recommendation.

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

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