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LEAP - When Selling Low Vol Makes Sense

  1. LEAP is trading $11.02 up 2.4% today.

    <img src="http://4.bp.blogspot.com/_hMry1m7UF10/TG7BqAXf6lI/AAAAAAAAEO0/bM9xfGYB-L4/s1600/leap_summary.gif">

    The company has traded over 16,000 options on total daily average option volume of just 5,243. 8,000 contracts have traded in a sale of 4,000 Sep 10/12 strangles. The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/08/leap.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/08/leap.html">in the article</a>) illustrates that the calls are mostly opening (compare OI to trade size). I believe the interest in the Sep 12 calls is long, so OI should decrease off this trade. Note that Sep vol is lower than any other month (top of Options Tab).

    The strangle sells 44 vol. The HV's are as follows (<a href="http://livevol.blogspot.com/2010/08/leap.html">in the article</a>):

    The intermediate term HV measures include the sudden drop in stock price after earnings; so they're a bit elevated. HV180&#8482 (6 months) is 58; so that's a decent measure of "expected" vol.

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

    We can see the strikes that traded; this is unequivocally selling low vol relative to Oct and the other months.

    Finally, the Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/08/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.

    Note in the stock chart we can see the sharp drop off of earnings and the near term slight recovery. Then in the bottom chart we can see the rather large vol difference between IV30&#8482 (~45) and HV20&#8482 (67.45).

    So everything we've seen here is that this trade sells low vol... Why would this be a reasonable trade? At times, after a stock has made a large move off of news (like earnings), stock's tend to "sit" for several weeks. Almost like it's been stunned into a catatonic state. In these cases, even the low vol can be a sale. I don't actually like this trade b/c takeovers (and takeover rumors) are back in the market and LEAP is a perpetual candidate, but I found it an interesting trade of low vol off a big move. Note the HV10&#8482 is < 35. So the vol sale is ~10 points higher than that.

    This is trade analysis, not a recommendation.

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