HRBN - A Wild Story and Wild Vol

Discussion in 'Options' started by livevol_ophir, Nov 16, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    HRBN is trading $19.91, down 2.5% with IV30™ up 6.0%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/11/hrbn.html">in the article</a>.

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

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    The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.&nbsp; Just a heads up, this ain't your average time spread - this is a pretty crazy story.

    <b>Custom Scan Details</b>
    Stock Price &gt;= $5
    Sigma2 - Sigma3 &gt;= 7
    Average Option Volume &gt;= 1,000
    Industry != Bio-tech
    Days After Earnings &gt;=5 and &lt;=50
    Sigma2, Sigma3 &gt;= 1

    The snapshot of the scan is included (<a href="http://livevol.blogspot.com/2010/11/hrbn.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/calendar_spread_scan_23.gif" width="600" />

    The goal with this scan is to identify third months that are cheaper than the second month by at least 7 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

    Looking to the Skew Tab (<a href="http://livevol.blogspot.com/2010/11/hrbn.html">in the article</a>), we can see the elevated vol in the second month (yellow line) relative to the third month (green line).

    I've circled three strikes: 17.5, 20 and 22.5. Each are elevated in Dec to March. The company had earnings on 11-10-2010, so there shouldn't be any kind of earnings event in the Dec options, yet that vol is substantially elevated to March. Further, Dec can be a month of dead vol... when stocks wither to nowhere and short premium can collect a nice win to end the year. These factors sort of mitigate the fact that HRBN has some wide(ish) option markets to trade on.

    Now we can turn to the Charts Tab (<a href="http://livevol.blogspot.com/2010/11/hrbn.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

    <img src="http://www.livevolpro.com/help/images/blog/apol_charts_11-8-2010.gif" width="600" />

    So there's a lot goin' on here:
    1. The IV30™ has exploded from ~30 to ~80 in ~8 weeks. Hello...

    2. The stock gapped up from ~$20 to ~$25 on 10-8-2010.
    News from AP: The head of China's Harbin Electric Inc. is teaming up with a private equity fund to try taking the company private.

    The electric-motor manufacturer said Monday that CEO Tianfu Yang and Baring Private Equity Asia Group are offering stockholders $24 per share for the stake Yang doesn't already own.

    Yang holds just over 31 percent of the company's stock. His bid amounts to a 20 percent premium over Harbin's closing share price Friday.

    3. The stock gapped down from $24 back to $20 on 10-25-2010.
    This was based on concerns over the company's operations and the buy-out itself.

    4. After the flashy show in #2 and #3 above, the stock climbed into earnings on an upgrade, then lost all that momentum after earnings.

    Finally, let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/11/hrbn.html">in the article</a>).

    <b>Potential Trades to Analyze</b>
    1. Start simple, though simple may not suffice:
    Sell the Dec 20 straddle @ $3.25, buy the Mar 20 straddle for $5.40, so pay $2.15 in the time spread.

    2. An alternative is to be long the juice. So, purchase the Mar 20 straddle for $5.40 and sell the Dec. 17.5/22.5 strangle @ $1.40, paying $4.00. The problem with this - if the stock moves hard, there is only $2.50 between the strikes, so that's "bad."

    3. Skip the calendar, sell the Dec. 20 straddle @ $3.25, buy the Dec 17.5/22.5 strangle for $1.50. This receives $1.75 (MaxGain), with MaxLoss $0.75.

    4. Slightly more adventurous than #3: same trade but sell the Dec. 12.5 puts @ $0.20. Naked short the downside, but collect more premium. This sells 115 vol... 115 vol!

    5. Just sell the straddle in Dec and... pray for no takeover.&nbsp; And if there is one, pray that the lawsuits haven't "inspired" the takeout price ove $24.

    This is trade analysis, not a recommendation.

    <b>Follow Live Trades and Order Flow on Twitter: @Livevol_Pro</b>

    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/11/hrbn.html">http://livevol.blogspot.com/2010/11/hrbn.html</a>

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  2. I appreciate the effort you put into screening for these and then providing the company's story line but as mentioned previously, AFAIK, you're not getting enough reward for the crapshoot risk that these offer. Given no inkling of how whether the takeover goes through ($24 ?) or whether it goes into the crapper, these positions are just shots in the dark.

    Now don't get me wrong. I like shots in the dark when the reward potential is sufficient but IMHO, set ups like this aren't. Seven pts. of IV difference b/t the two months just isn't enough to construct something that might do well with no movement or a big movement in either direction. Yeh, I know, what could possibly do that? :)

    Furthermore, these options have Holland Tunnel wide spreads. That makes any kind of adjustment much harder should one want to work the position intraday - and that can be for locking in some profit as well as trying to ameliorate a loss.

    Also, I don't get why you suggest the calendar straddle in #1 but pan the idea of the calendar in #3. They're essentailly the aame - just double (or half), depending on whether you're a 1/2 full or 1/2 empty kinda guy :)

    Again, thanks for the info.