KWK - options Trade Reveals Trading Opportunity

Discussion in 'Options' started by livevol_ophir, Jun 4, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    KWK is trading 12.41 with IV30&#8482 up 10.2%.

    <img src="">

    The company has traded nearly 18,000 options on total daily average option volume of just 1,536. A July 11/13 strangle (sell puts/buy calls) has accounted for the vast majority of volume. The Stats Tab and Day's biggest trades snapshots are included (<a href="">in the article</a>).

    The Options Tab (<a href="">in the article</a>) illustrates that both the calls and the puts are opening (trade volume >> OI). Also note how the front two month vols are now rising - much more than the back months.

    The Skew Tab snap (<a href="">in the article</a>) for this one is awesome. As most of you who read this know I love skew. This is a great example why. With just the skew chart I am guessing that most of you could have guessed the largest trades today.

    You can see clearly that the Jul 11 puts (circled) have an obvious bend downward in vol relative to the rest of the line (this is from the sales). On the other hand, you can see the Jul 13 calls (also circled) have an obvious bend upward (this is from the purchases). When skews change shape like this, opportunities present themselves. These two strikes <b>don't exist in a vacuum</b>, but in the near term, they behave as though they do. This is a trading opportunity. Can you see it?

    Finally, the Charts Tab (6 months) is below (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    You can see a fairly substantial drop and re-tracement recently.

    This is trade analysis, not a recommendation.

    Details, prices, trades, vols, skews, charts here:
  2. 1) Regarding nomenclature, isn't "that" a collar or synthetic-long and not a strangle?
    2) Is it "arb-able" against UNG or NYMEX natural gas?
    3) Do you "fade" that trade against the stock or other options? :confused:
  3. livevol_ophir

    livevol_ophir ET Sponsor

    it's a risk reversal, sorry bout that. :(

    The way to win to that skew is to take the opposite side of the big bet using the great prices, then undo it using other options which haven't adjusted.
  4. It looks like maybe $0.03 in edge as artifact of the bull risk-reversal. The stuff is really wide, so it's really academic beyond a lesson on microstructure.