IDCC - Elevated Vol

Discussion in 'Options' started by livevol_ophir, Dec 2, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    IDCC is trading $34.00, up 0.8% with IV30™ down 1.0%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/12/idcc.html">in the article</a>.

    <img src="http://www.livevolpro.com/help/images/blog/idcc_summary_12-2-2010.gif" />

    I found this stock using a real-time custom scan. This one hunts for high vols.

    <b>Custom Scan Details</b>
    Stock Price &gt;= $7 and &lt;= $70
    IV30™ - HV20™ &gt;= 10
    HV180™ - IV30™ &lt;= -8
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech
    Days After Earnings &gt;=10 and &lt;=60

    The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). 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 IV30™ simply because earnings are approaching. The IDCC Charts Tab is included (<a href="http://livevol.blogspot.com/2010/12/idcc.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).

    We can see:
    IV30™: 50.11
    HV20™: 38.29
    HV180™: 29.84

    So, IV30™ is elevated relative to the short term and long term realized movement of the stock.&nbsp; It looks a vol sale over 43 would be reasonable, a purchase under 24 would also be reasonable.

    Let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/12/idcc.html">in the article</a>).


    Note how high the Jan vol is. This is a great way to see how the IV30™ is a blended average of two months. Selling 43 (ish) vol would be reasonable, which is actually above the Dec 34 straddle. The Jan 34 straddle is priced at ~53 vol, but carries more risk.&nbsp; The second month is priced at around 53 vol, or 9 points higher than Dec.

    <b>Possible Trades to Analyze</b>
    1. Sell the Dec 34 straddle @ $2.25 or 41 vol.

    2. Sell the Dec 33/35 strangle @ $1.40 or 42 vol.

    3. Sell the Dec 32/37 strangle @ $0.70. Note that the Dec 37 calls are 48 vol. Whoa... Takeover rumor?

    4. #3, but cover the upside with a 38 call purchase for 0.25. That's a $0.45 credit, max upside loss is $0.55, naked downside.

    Note for trades 1-3, those are naked short. I thin covering the upside in a takeover happy world is a good idea. Another approach is to sell meat (ATM) and buy OTM on a ratio, like 3:1. This should yield a premium if the stock sits and a nice win if the stock is taken over.

    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/2010/12/idcc.html">http://livevol.blogspot.com/2010/12/idcc.html</a>

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