ESI - Time Spread Opportunity

Discussion in 'Options' started by livevol_ophir, Nov 3, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    ESI is trading $61.69, down 5.4% with IV30™ up 2.6%. The <a href="">LIVEVOL™ Pro Summary</a> is <a href="">in the article</a>.

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    For a limited time we are offering a FREE real-time trial to Livevol Pro™ for non-professional traders. You can get your trial by following the directions here: <b><a href="">Click for Free Trial Offer</a></b>

    Second one of this flavor today...

    The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

    <b>Custom Scan Details</b>
    Stock Price &gt;= $5
    Sigma1 - Sigma2 &gt;= 8
    Average Option Volume &gt;= 1,000
    Industry != Bio-tech
    Days After Earnings &gt;=5 &lt;=70
    Sigma1, Sigma2 &gt;= 1

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

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    The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. 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 front month vol simply because earnings are approaching.

    Looking to the Skew Tab (<a href="">in the article</a>), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

    Note the vol difference between the front two months. I've highlighted a strangle, but the entire term structure is clearly priced with front &gt; back.

    Now we can turn to the Charts Tab (<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).

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    This stock can move a lot. It's an expensive stock with pretty high vol. This makes for expensive options and a substantive amount of risk.

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

    We can see Nov vol is priced at ~62.5 and Dec at about 55.

    <b>Potential Trades to Analyze</b>
    1. Strangle calendar: Sell Nov 55/67.5, Buy Dec 55/67.5. The fair value for the Dec 67.5 calls using 51 vol is $2.31 (note there is no bid there yet on max wide markets). This calendar would pay ~$4.70, sell ~$2.05 so a net debit of ~2.65. Buying 55 vol (ish) selling 65 vol (ish).

    2. The strikes don't have to be even, putting on more risk could sell a closer to the money strangle and buy further OTM for a net even (ish) trade.

    3. The opposite of #2 above. If you feel like a move is coming, sell further OTM front and buy closer to the money back. This allows a bit of wiggle room for the stock to move but is more expensive.

    This is trade analysis, not a recommendation.

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