FIRE - Calendar Spread on Stock Collapse

Discussion in 'Options' started by livevol_ophir, Nov 24, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    FIRE is trading $27.74, up 1.4% with IV30™ down 1.5%. The <a href="">LIVEVOL™ Pro Summary</a> is <a href="">in the article</a>.

    <img src="" />

    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™.

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

    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).

    We can also see a particulalry large vol difference between the Dec/Jan 35 calls.

    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).

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

    We can see the total collapse on the last earnings release. The stock gapped down ~ $8. Here's a news snippet from

    The third-quarter report Sourcefire filed last night was better than expected, but the outlook for the fourth quarter was far weaker than the average analyst was hoping for. The maker of the Snort intrusion detection software package says revenue should inch up slightly in the next period while earnings drop from current levels.

    So, good results, but outlook not as bright as was anticipated.

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

    <b>Potential Trades to Analyze</b>
    1. Sell the Dec 25/30 strangle @ $1.80, buy the Jan 25/30 strangle for $3.50. That's a net debit of $1.70, sells ~68 vol and purchases ~63 vol.

    2. If you think there's upside to this stock, a Dec/Jan 35 call spread costs $0.50, and sells 78 vol to a ~65 vol purchase. This is also a trade that would benefit from a "January Effect," which you may or may not subscribe to...

    3. If you think the downside is over stated now that the stock has rallied, selling the Dec 22.5 puts @ $0.30 or better sells ~72 vol against HV180™ (long-term realized trend) of 61.58. A Dec/Jan 22.5 put spread might also be worth looking at, as it sells ~ 8 vol points higher than it purchases.

    NB: With these wide markets, if you can't get good fills that are inside NBBO on both sides of a spread by at least $0.05, then this might just be a "pass" as a trading vehicle.

    This is trade analysis, not a recommendation.

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