FNSR - Vol Purchase and Strategic Sales

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

  1. livevol_ophir

    livevol_ophir ET Sponsor

    FNSR is trading $19.06, up 1.4% with IV30™ up 2.5%.

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

    I found this stock using a real-time custom scan. This one hunts for low vols outside of the front month.

    <b>Custom Scan Details</b>
    Stock Price &gt;= $7 &amp;lt;= $70
    IV60™ &gt;= 1
    IV60™ - HV60™ &amp;lt;= -8 &gt; - 40
    HV180™ - IV60™ &gt;= 8
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech

    The snapshot of the scan is included (<a href="http://livevol.blogspot.com/2010/10/fnsr.html">in the article</a>) in case you want to build it yourself in Livevol Pro™.

    <img src= "http://www.livevolpro.com/help/images/blog/fnsr_iv60_purchase_Scan.gif" width="600">

    The goal with this scan is to identify mid-term implied vol (IV60™) that is depressed both to the mid-term stock movement (HV60™) 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) and want to avoid bio-techs (and their crazy vol).

    The FNSR Charts Tab is included (<a href="http://livevol.blogspot.com/2010/10/fnsr.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV60™ - yellow vs HV60™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

    We can see:
    IV60™:&nbsp; ~47
    HV60™:&nbsp; 60
    HV180™:&nbsp; 57

    So, IV60™ is depressed relative to the midterm and long term realized movement of the stock. We can also see a steady stock price increase of late which could point to lower vol - just make note. Finally, let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/10/fnsr.html">in the article</a>).

    We can see that the Nov&nbsp;19 straddle is priced at about&nbsp;45.5 vol or a $2.60 purchase. The&nbsp;Oct 20 straddle is priced at&nbsp;~47.5 vol. Earnings shouldn't play a role in this trade as they are projected out in December.

    <b>Possible Trades to Analyze</b>
    1. Buy the Nov 19 straddle for $2.60.&nbsp; At Nov expo. this trade requires FNSR to be outside of ($16.40, $21.60).&nbsp; FNSR 52 wk. stock price range is [$7.05, $19.51].&nbsp; If vol increases substantially this trade will win as well even if the stock doesn't move.&nbsp; This trade loses to time decay.

    2) A touch less risky is to do #1 above and sell something around it.&nbsp; A Nov 16/22 strangle @ $0.60 brings the net debit to $2.00.&nbsp; Note however this does substantially limit the upside.&nbsp; Max gain would become just $1 in either direction.

    3) Trade #1 with a sale of the Oct 19 straddle @ $1.40 nets a total debit of $1.20.&nbsp; This turns the tables a bit, as it wins to time decay and hopes for little stock movement during the Oct options cycle.&nbsp; Hypothetically it leaves a nice cheap long straddle in Nov if the stock sticks where it is now.&nbsp; If that Oct sale works out, the next move could be to sell the strangle in trade #2 AFTER Oct expo. Something like this would be my most likely approach, but then again, I'm allergic to buying options.

    4) A slightly more advanced and risky trade is to do #2, but sell 2 calls and 2 puts.&nbsp; That creates a net debit $1.40 (selling $0.60 twice).&nbsp; The strategy is naked short options to the upside (beware of a takeover) and the downside (beware of stock collapse).

    Details, trades, prices, vols, charts here:

    This is trade analysis, not a recommendation.
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