Life Technologies (LIFE) - Vol Seller

Discussion in 'Trading' started by livevol_ophir, Dec 21, 2009.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    LIFE averages 1,965 option contracts traded a day. Today nearly 14,000 have traded. Note not just the volume but that it is equally distributed between calls and puts.

    The largest trade of the day is a sale of Feb 50/55 strangle @ 2.10 (1.35 in calls and 1.75 in puts).

    Clearly these are opening orders (both legs). I can see this by the size of the open interest relative to the size of the trades.

    This is an opening short vol position. The pay off of the short strangle at Feb expo achieves max gain when the stock is between 50-55.

    But that's at expo. The trade is short vega; specifically: -0.074 (calls) and -0.079 (puts) = $0.15 for every vol point x 5000 x 100 = $76,500 for every point vol moves down (or negative that number if vol moves up). Note that vega is not constant, so linealy multiplying that number by 31 does not lead to the max payoff (it is some number greater than the max payoff which is not possible).

    You can see clearly that the IV30 is trading well above the HV30. Further, the trades sold ~31 vol.

    The historical vol is ~ 16% or 15 vol points lower than the trade. The payoff can get a little tricky pre Feb. expo as there is also time decay (theta). Clearly this trade is short theta - so it makes money if all else stays the same and time moves forward.

    If vol where to drop to the historical level (30 day historical level) immediately without a stock move, the payoff would be sizeable and the position could be closed. Selling strangles is almost certainly not retail - and a trade this large is definitely not retail. So it seems that institutional money is taking a vol bet (down) on LIFE.

    You can see all the details, charts, prices, greeks and payoffs on my blog:
  2. livevol_ophir

    livevol_ophir ET Sponsor