MGM - Vol Play into Earnings

Discussion in 'Options' started by livevol_ophir, Oct 25, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    MGM is trading $11.25, up small with IV30™ up 4.7%. The <a href="">LIVEVOL™ Pro Summary</a> is <a href="">in the article</a>.

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    I found this stock using a real-time custom scan. This one hunts for low vols. Note that MGM has earnings coming out Nov. 3, hmm...

    <b>Custom Scan Details</b>
    Stock Price &gt;= $7
    IV30™ - HV20™&nbsp;&lt;= -8 and &gt;= -40
    HV180™ - IV30™ &gt;= 7
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech
    Days After Earnings &gt;= 32

    The snapshot of the scan is included (<a href="">in the article</a>) in case you want to build it yourself in Livevol Pro™.

    <img src="" width="600" />

    The goal with this scan is to identify short-term implied vol (IV30™) that is depressed both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not purchasing depressed IV30™ relative to HV20™ simply because of a large earnings move.

    First, let's look to the MGM Charts Tab (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

    We can see:
    IV30™: 53
    HV20™: 78
    HV180™: 62

    So, IV30™ is depressed relative to the short term and long term realized movement of the stock. The HV20™ is a bit misleading as MGM gapped down $1.51 on 10-13-2010. But still, the longer term realized is in the sixties.

    Now, let's look at how MGM has moved on earnings (<a href="">in the article</a>). I have included the one day straddle move. That is, the change in straddle value from the day before earnings to the day after.

    We can see that 5/8 times, the one day straddle went down in value (vol was a sale) and 3/8 times the one day straddle was a purchase (vol was a purchase). To me that indicates that the vol has been pretty fairly priced - it's essentially a coin flip. But...

    The average IV one day before earnings has been 143.37%. That number is useless though, given how much the market has changed over the last 8 quarters. More relevant, the last two earnings cycles IV was 71.51% and 71.59%. One was a sale, one was a purchase. Right now I see the ATM straddle priced at ~52.5% vol. Obviously, vol should rise into earnings so it shouldn't really be in the 70's yet, but given that vol is depressed AND this earnings vol analysis, this makes an interesting one to analyze.

    Finally, let's look to the Options Tab (<a href="">in the article</a>).

    <b>Possible Trades to Analyze</b>
    1. Buy the Nov 11/12 strangle for 52ish vol or $0.83.

    2. The idea of buying naked options into earnings makes me throw up a little in my mouth, so maybe we can look at a spread. Sell the Nov 10/13 strangle @ $0.28.

    3. Rather than looking at Nov, check out Dec. Theta works less abruptly as the trade awaits earnings, though it does get longer vega and in general is a more expensive trade.

    This is trade analysis, not a recommendation.

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

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