LEAP - Put Spread Opportunity on Dipping Stock

Discussion in 'Options' started by livevol_ophir, Jul 19, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    LEAP is trading $12.15, down 2.7% today with IV30&#8482 up 3.6%.

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/TER89_9NPxI/AAAAAAAADmg/a-CWF9Gk5jQ/s1600/leap_summary.gif">

    The company has traded over 16,000 options in the first three hours on total daily average option volume of just 5,030. All but 2,506 contracts have been puts. The largest trade has been an Aug 11/10 put spread 1x2 (buy Aug 11 , sell 2 Aug 10). The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/07/leap.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/07/leap.html">in the article</a>) illustrates that the puts are mostly opening (compare OI to trade size). Also note that earnings are 8-3-2010 AMC.

    <b>Trade Stats</b>
    If we reconstruct the trade using the prices from the Options Tab we see:
    Buy 1 Aug 11 put for $0.44 (inside NBBO)
    Sell 2 Aug 10 put for $0.20 (inside NBBO)
    The trade costs $0.04 with a max gain of $0.96. The trade loses money with LEAP below $9 (naked short 1 put from there on).

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/07/leap.html">in the article</a>) illustrates the vols by strike by month.

    We can see the downside is pretty normal looking; this trade definitely sells higher vol than it purchases as is the expected case with a put spread. We can also see the upside is bid in Aug (i.e. bends upward). LEAP is a perpetual "takeover candidate" so the upside tends to have bids in the ATM calls.

    Finally, the Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/07/leap.html">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.

    We can see that LEAP is at or near it's 52 week low right now with IV30&#8482 rising and earnings on the way in a couple of weeks. If you think the downside is limited to no more than $9, then this could be a cheap bearish bet on the stock taking advantage of downside put vol rising.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:http://livevol.blogspot.com/2010/07/leap.html
  2. Longer term traders might look at a LEAP...but that could be confusing. :p
  3. ptrjon


    I heard you like long term options, so we bought you a LEAP on LEAP so you can speculate while you speculate!