FRX - Risk Reversal Trades in Sep

Discussion in 'Options' started by livevol_ophir, Jul 23, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    FRX is trading $28.28, with IV30&#8482 up 2.7% today.

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    The company has traded over 13,000 options on total daily average option volume of just 4,261. 12,000 of those contracts came on one trade; a Sep 26/31 risk reversal (sell puts/buy calls) against $28.22 stock on a 39 delta. Mike Bristow, head of the brokerage for the Vtrader Group, gave me the color. The Stats Tab and Day's biggest trades snapshots are included (<a href="">in the article</a>).

    The Options Tab (<a href="">in the article</a>) illustrates that the calls opening (compare OI to trade size). The puts are harder to tell at first glance. It turns out that entire 5,000 OI traded two days ago on the 21st, and they are short, so the trade today will increase that OI.

    <b>Trade Stats</b>
    Buy 6,000 Sep 31 calls for $0.30
    Sell 6,000 Sep 26 puts @ $0.30
    Sell 234,000 shares of FRX stock @ $28.22

    The PnL chart for this trade is included (<a href="">in the article</a>).

    The trade makes money at Sep expo if the stock is in the $26 range or above the $33 range. Max loss is at $31 (the long strike).

    The Skew Tab snap (<a href="">in the article</a>) illustrates the vols by strike by month.

    The skew looks pretty normal; though Sep vol is well below Nov vol. There should be an earnings release in Oct, so that makes sense. You can see this trade sells higher vol and buys lower.

    Finally, the Charts Tab (12 months) is below (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    We can see that IV30&#8482 is above the HV20&#8482 and has been for the last month. Two earnings cycles ago so saw a gap down in stock price, but the last cycle a couple of days ago was pretty muted. IV60&#8482 and HV60&#8482 are almost equal (27.00 to 26.15 respectively). A vol sale in August seems reasonable, but this is a known takeover target in a risky industry, so my best play on this one is no trade at all unless you have conviction.

    This is trade analysis, not a recommendation.

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