HIG - Sep Calls Trade Size; Skew Turns Awesome

Discussion in 'Options' started by livevol_ophir, Sep 10, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    HIG is trading $22.93, up 2.7% with IV30&#8482 17.1%.

    <img src="http://2.bp.blogspot.com/_hMry1m7UF10/TIpwxt7DmiI/AAAAAAAAErk/4ezlAAN0_q8/s1600/hig_summary.gif">

    The company has traded over 64,000 options on total daily average option volume of just 8,502. The action is in Sep calls, with over 40,000 trading in the front month, yielding a 13:1 call : put ratio. The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/09/hig.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/09/hig.html">in the article</a>) illustrates that the calls are all mostly opening (compare OI to trade size). I'm actually not quite clear if it's buying/selling, but the vol is jumping and the skew is aggressively bent.

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

    <img src="http://2.bp.blogspot.com/_hMry1m7UF10/TIpw14iSF7I/AAAAAAAAEsE/M4lLP8ZVh3U/s1600/hig_skew_9-10-2010.gif">

    Note the Sep upside skew is wildly bid. The Sep 29 calls are $0.06 bid, or 101 vol on ATM vol of just 48.5 in Sep. The Sep 25 calls are 64 vol, which is still well above ATM, but also demonstrates how steep the reverse skew is.

    Finally, the Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/09/hig.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue vs. HV180&#8482 - pink). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    So they IV30&#8482 is popping but still below the short term realized move. Both short term realized (58) and IV30&#8482 (52) are well above the long term HV of 44.

    As far as I can tell, there is some Dutch auction for some deep warrants going on. Warrants increase the float.

    <b>Possible Trades to Analyze</b>

    First, make sure to understand the auction and the warrants. Second... do the same thing again. Selling the upside in Sep covering with something, whether that's Sep lower calls or doing it in Oct seems like a reasonable bet to analyze.

    This is trade analysis, not a recommendation.

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

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  2. Most people here pay a penny to sell that garbage call, so the risk-reversal is essentially flat based upon microstructure. Even a short backspread is only netting an extra dime. What would you trade here?
  3. livevol_ophir

    livevol_ophir ET Sponsor

    A simple 22/24 call spread costs $0.83 with $0.89 of parity. Could go wider 22/25 or even 22/24/26/28 b/s/s/b. Maybe a Sep/Oct 24 c/s - only costs $0.65. Hold on for one week.

    A buy write mightbe ok as well; like with the 25 line.