EBIX - Elevated Vol Trade and Scalping Earnings

Discussion in 'Options' started by livevol_ophir, Sep 29, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    EBIX is trading $24.20, up 0.8% with IV30™ up 1.3%.

    <img src="http://1.bp.blogspot.com/_hMry1m7UF10/TKNWQ5JEGRI/AAAAAAAAFBs/1L1aF82LRwQ/s1600/ebix_summary.gif">

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

    <b>Custom Scan Details</b>
    Stock Price >= 5
    IV30™ - HV20™ >= 10
    HV180™ - IV30™ <= -8
    Average Option Volume >= 1,200
    Industry != Bio-tech
    Days After Earnings >=10 <=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 EBIX Charts Tab is included (<a href="http://livevol.blogspot.com/2010/09/ebix.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). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

    <img src= "http://1.bp.blogspot.com/_hMry1m7UF10/TKNWPhGjCXI/AAAAAAAAFBk/4t0mYoiPveg/s1600/ebix_charts.gif" width ="500">

    We can see IV30™ is ~57 vs HV20™ of 41. Also, the long term trend of realized vol, HV180™, is just 42, so vol is elevated. You can actually find a bunch of stocks with short term implied that's elevated relative to short term realized as the market has been in a steady upswing and we're going into Oct, which can be "jittery" to say the least. I like EBIX in particular because the long term HV (HV180™) is also quite low.

    Finally, let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/09/ebix.html">in the article</a>).

    We can see that the Oct 24 straddle is priced at about 55 vol or a $2.20 sale. The Nov 24 straddle is at 56 vol (or $4.10 to purchase) but earnings are probably in the Nov options cycle. This is interesting as earnings area volatility event and present a nice little cover to a possible sale.

    <b>Possible Trades to Analyze</b>
    1) The riskiest trade would be a naked straddle sale in Oct @ $2.20. In this new found world of takeovers, I think a touch more prudence may be appropriate.

    2) With the above in mind, selling the Oct straddle at $2.20 and buying 2 Oct 27 calls for $0.50 total, or a $1.70 net credit, may be a bit safer. Note this still has naked downside risk.

    3) Noting that earnings are in the Nov cycle, another trade seems reasonable. A sale of the Oct 24 straddle and a purchase of the Nov 24 straddle yields a $1.90 debit. Last earnings cycle the IV30™ reached as high as 64.69, so a 56 vol purchase in Nov might actually be a winner using the Oct straddle sale to fund the time decay. The hope here would be that EBIX sticks close to $24 on Oct expo, then the Nov 24 straddle (long) should be worth well over the $1.90 debit. A sale of that straddle right before earnings on elevated vol is one approach to exiting the strategy. Keep in mind, this trade loses to a takeover unlike #2, as it's long vega through the calendar spread. Unlike #1 though, it has a capped max loss of $1.90.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, charts here:

    Legal Stuff:
    <a href="http://www.livevolpro.com/help/disclaimer_legal.html">http://www.livevolpro.com/help/disclaimer_legal.html</a>
  2. livevol_ophir

    livevol_ophir ET Sponsor

    Will be interesting to watch the volatility evolution in this one...