MDRX - Professional Vol Trade and Vega Positioning

Discussion in 'Options' started by livevol_ophir, Jun 17, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    MDRX is trading $16.40, down 1.2% today with IV30&#8482 up 4.7%.

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    The company has traded over 23,000 options on total daily average option volume of just 915, whoa! The largest trades were a few minutes a part - Sep 17.5 straddle and Jul 15/17.5 strangle sales tied to $16.33 stock, delta neutral. The Stats Tab and Day's biggest trades snapshots are included (<a href="">in the article</a>).

    I have also included the stock Time&Sales (<a href="">in the article</a>). Note the "Derivative" Condition. This is the stock that went up with the trades.

    The Options Tab (<a href="">in the article</a>) paints a clearer picture of what traded (everything was a sale). All of the trades were substantially opening with the exception of possibly the Sep 17.5 calls.

    <b>Trade Stats</b>
    Sell 6,645 Jul 17.5 calls @ $0.20
    Sell 6,645 Jul 15 puts @ $0.25
    Sell 3,323 Sep 17.5 calls @ $0.80
    Sell 3,323 Sep 17.5 puts @ $1.90
    Sell 106,500 stock @ $16.33

    The PnL chart at Sep expo is included (<a href="">in the article</a>).

    <img src="">

    The expo chart is useful, but it's also a little limiting. This trade is short vol, and it can close for a big win (or loss) well before expo. Let's look at the vega:

    Sell 6,645 strangles = 6,645*(-.03) = -$21,264/vol
    Sell 3,323 straddles = 3,323*(-.064) = -$21,267/vol
    Stock has no vega.

    Now we can see the trade is in fact a well designed vol sale. Perfectly sized so each trade gets the same amount of short vega. In English, if the vol goes down a point, the strategy wins ~$42,500 (and vice versa). Keep in mind that vega is a function (not a constant), so it changes with vol as well (the second derivative of option price wrt to vol is not zero).

    The Skew Tab snap (<a href="">in the article</a>) illustrates the vols per strike per month.

    We can see the July 17.5 calls were the lowest vol of the bunch.

    Finally, the Charts Tab (1 year) 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.

    We can see the stock has dropped pretty hard recently. Last time I touched on this stock (an earnings blog), it was over $20, and that was 4-8-2010. The IV30&#8482 (red line) is actually lower than the realized movement (HV20&#8482 is the blue line). This is a big vol position. I'd even call it a "statement." Really interesting.

    This is trade analysis, not a recommendation.

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