F - Vol Rising to Elevated Levels

Discussion in 'Options' started by livevol_ophir, Nov 16, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    F is trading $16.66, down 2.0% with IV30™ up 3.9%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is below.

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

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    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;= 10
    HV180™ - IV30™ &lt;= -8
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech
    Days After Earnings &gt;=10 and &lt;=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 F Charts Tab is included (<a href="http://livevol.blogspot.com/2010/11/f.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://www.livevolpro.com/help/images/blog/f_charts.gif" width="600" />

    We can see:
    IV30™: ~48.87
    HV20™: 36.60
    HV180™: 38.93

    So, IV30™ is elevated relative to the short term and long term realized movement of the stock.

    Let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/11/f.html">in the article</a>).

    <b>Possible Trades to Analyze</b>
    1. Start risky: Sell the F Dec 16/17 strangle @ $1.42. That's ~48 vol.

    2. Take some risk off: Do #1, but purchase either a Dec 15 put or a Dec 18 call. Either way, that long option leaves the position essentially no risk to that side since the credit is ~ $1.00 and the strikes are just $1.00 wide.

    3. For you margin weary guys, a purchase of the Dec 15/18 strangle for $0.78 against the 16/17 strangle sale yields a net credit of $0.64 (MaxGain) and a MaxLoss of $0.36. So a 1.78:1 ratio selling elevated vol. I've included the PnL chart (<a href="http://livevol.blogspot.com/2010/11/f.html">in the article</a>) for this trade at Dec expo.

    This trade requires F to be in the range ($15.40, $17.60) on Dec. expo. Quick log normal rounding analysis demonstrates that the vol you "think" the stock will move at is the key.

    If we take vol to be the Dec 17 level (~48), then this trade has a ~44% chance of winning (using a long list of assumptions). But, if we take the vol to be the HV180™ (38.93), then the probability of profit rises to 53.5%.

    The point here is not to use these numbers, but rather to demonstrate what it <i>actually means</i> to sell vol. i.e. what the implication is of a vol bet.&nbsp; That 10 point vol difference in expectation changes the outlook of the trade fairly dramatically.&nbsp; In English, selling vol means <em>you believe it will go down</em>.

    NB: GM IPO is coming soon.

    This is trade analysis, not a recommendation.

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    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/11/f.html">http://livevol.blogspot.com/2010/11/f.html</a>

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