HL - Call Buyers Create Backwards Skew Trading Opportunity

Discussion in 'Options' started by livevol_ophir, Aug 27, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    HL is trading $5.35, up 3.9% with IV30&#8482 up 5.5% today.

    <img src="http://2.bp.blogspot.com/_hMry1m7UF10/THfSpvfezDI/AAAAAAAAEYE/qky-gSRVnbA/s1600/hl_summary.gif">

    The company has traded over 36,000 options in the first hour on total daily average option volume of just 7,322. All but 3,158 contracts have been calls yielding a 10:1 call : put ratio. The largest trades have been Dec 5 call purchases (~25,000x). The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/08/hl.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/08/hl.html">in the article</a>) illustrates that the Dec 5 calls are mostly opening (compare OI to trade size). Note also how vol is up across the board from Oct through Jan'12.

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/08/hl.html">in the article</a>) illustrates the vols by strike by month.

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/THfSrRxk7fI/AAAAAAAAEYk/7xzHSqWFuQc/s1600/hl_skew_8-27-2010.gif" width = "500">

    This is interesting. It looks like the order flow has pushed the upside skew upwards creating a parabola. This makes a call spread unique in that you can scalp skew while getting long. The vols are of particular importance in this name, let's look to the charts to see why.

    Finally, the Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/08/hl.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV120&#8482 - green vs HV120&#8482 - purple). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    Note how the IV120&#8482 is well above the HV120&#8482 and diverging even more of late. As of right now I see the difference as ~56 to 44 or 12 vol points. The call purchases today actually printed on vol as high as 60 (see largest trades snap in the top of the article).

    A Dec 5/7 call spread looks to purchase 55 vol and sell 58 vol. If you like the order flow and want to get some deltas in here, a spread looks pretty good - neutralizing the high vol and even scalping a bit. Paying $0.60 in the 5/7 call spread seems reasonable. The trade doesn't scream good or bad to me.

    The 52 wk range for the stock is [$2.85,$7.47], which is pretty wide.

    This is trade analysis, not a recommendation.

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

    Legal Stuff:
    <a href="http://www.livevolpro.com/help/disclaimer_legal.html">http://www.livevolpro.com/help/disclaimer_legal.html</a><blockquote></blockquote>