GCI - Risk Reversal Gets Long in Oct; Scalps Skew

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

  1. livevol_ophir

    livevol_ophir ET Sponsor

    GCI closed at $13.48 yesterday, up more than 5%.

    <img src="http://1.bp.blogspot.com/_hMry1m7UF10/TID0GyPnG8I/AAAAAAAAEh8/5-pgF6PEDv0/s1600/gci_summary.gif">

    The company traded over 33,000 options on total daily average option volume of just 3,510. The largest trade was an Oct 10/16 risk reversal (sell puts/buy calls) 10,650 times, no stock for even. Darren Story of Student Options alerted me to this trade and gave me the color. The Stats Tab and Day's biggest trades snapshots are included (<A href="http://livevol.blogspot.com/2010/09/gci.html">in the article</a>).

    The Options Tab (<A href="http://livevol.blogspot.com/2010/09/gci.html">in the article</a>) illustrates that both the calls and puts are mostly opening (compare OI to trade size).

    Note that the Oct vol is above Sep, Jan'11 and Apr'11. This trade sells 59 vol and buys 44 vol; essentially selling the downside skew to fund the upside, yielding a premium neutral trade while accumulating a rather hefty OTM delta bet.

    The Skew Tab snap (<A href="http://livevol.blogspot.com/2010/09/gci.html">in the article</a>) illustrates the vols by strike by month.

    <img src="http://4.bp.blogspot.com/_hMry1m7UF10/TID0H8ye4QI/AAAAAAAAEic/QdhHrEYSy6Q/s1600/gci_skew_9-2-2010.gif">

    While the skew looks normal, we can see a fairly pronounced smirk. The downside is pretty bid relative to the upside. This trade makes use of the vol difference. Note that the trade gets long a strike that's $2.50 OTM, while selling a strike that's $3.50 OTM, yet pays nothing for it.

    Finally, the Charts Tab (6 months) is below (<A href="http://livevol.blogspot.com/2010/09/gci.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

    A couple things to note here.
    1) The IV30™ has diverged away from the HV20™. What's happened is that the implied has stayed steady as the stock has muddled around dropping the realized vol. The vol diff is now more than 10 points.
    2) The retail order flow looks to be buying puts (see the red color in the volume bars at the bottom) as of early July.

    I like that the trade is premium neutral; can't see a naked purchase of vol in this name, especially in Oct, without a really good reason. The 52 wk range is [$7.66,$19.69], so the stock has seen levels well above and below the strikes.

    This is trade analysis, not a recommendation.

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

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