OCs Implied Volatility Trading Journal

Discussion in 'Journals' started by El OchoCinco, Oct 25, 2006.

  1. Hello! This journal will be dedicated solely to trading volatility. Directional bias allowed but only in a manner to exploit low or high volatility or skews between the months. Positions will lean to limited risk or small size and include any strategy or underlying as long as vol is the main factor in deciding on the position or direction.

    I will post stocks with interesting IV situations or skews and discuss a position or two. Others are free to contribute. remember the goal is to discuss how to trade or use IV to our advantage in putting on a position.
  2. First entry:

    COGT @ 12.68

    Earnings due November 2nd or thereabout.

    Look at the skews in the months:


    Price chart of COGT shows potential bottom. Option premiums not rich enough for short calendars or is potential move big enough in my opinion based on past price history. 2 days ago big drop in price so I may use the vol skew to take a home run bet on COGT making a move.

    Home Run Bet defined: For me a home run bet is where I put a very small amount of cash at risk for a potential large profit potential. It is a bet because it is purely a guesstimation of the next move.


    OTM cheap calendar on a bet that COGT has a realtively decent move on its earnings report and vols in the front month drop sharper than vols in back month. Delta bias with OTM call calendar.

    STO 50 COGT NOV $15.00 Calls @ $0.20

    BTO 50 COGT DEC $15.00 Calls @ $0.45

    This kind of trades are such that you miss a few and if you hit one it can produce nice returns. Strictly a cheap directional gamble.

    If you cannot get any fills then you can look at the ITM $15.00 PUT NOV/DEC long calendar which you can fill no at $0.25 per spread.

    I am still studying the chain for other suggestions.
  3. Great, just when i was thinking of starting a vega trading journal in january '07, you beat me to it.

    Phil, is this a step to monopolize ET's journal section? :D

    Good luck with your trades. Will follow along and pollute from time to time.

    As for your first trade, i would've gone with the ATM one but good luck anyway. Also, from experience, i would try not to pay more than 15-20 cents for these cheap calendars on low notional stocks. A move <10% when opened ATM generally speaking will break you even or better. Very very tame so a good fill is a must IMO.
  4. I do not have this position, just threw it out there ;).

    But I do not intend for this to be my journal, just a place to discuss these kind of vol trades...
  5. NFLD- Northfield Labs.

    HUGE inflated IV. I think an FDA filing is being planned and an announcement of clinical trials by the end of the year.

    Vols are 100 in NOV, 168 in DEC and 140 in JAN for ATM strikes (more or less).

    This one is harder to play since we do not know whe the news is coming....
  6. Interesting play while waiting for the data or news to come out.

    BTO 8 MAY07 NFLD $17.50 calls @ $2.50 (IV89%)

    STO 4 DEC NFLD $20.00 calls @ $1.10 (IV142%)

    Initial cost is about $1540.

    If news hits earlier or IVs ramp up before end of year, then you can sell more calls against the long MAY to reduce the net debit and risk. If the stock takes off early, you are still +delta.

    If the market stays flat as no news is announced by DEC, then you got the MAY call for almost half price and can sit on it and make other adjustments.

    if stock drops on bad trials or news, then loss is limited to about $1,500 or so. Good news could send the stock over $20 for 3x the profit. That includes the IV crush that could occur on the news factored in.

    Just an idea to go long-term and finance it partially with some higher IV OTM calls.

  7. I dipped my toe for a small bullish play on it.

    BTO 6 MAY07 NFLD $17.50 calls @ $2.55
    STO 3 DEC NFLD $20 calls @ $1.00

    Total Cost = $1,230

    If the trials are good and they follow up with FDA action, stock could get back to $25 where it was last year. This is a bullish home run bet. I figured I could buy the far in time OTM calls and finance them with some DEC calls when the announcement is due. If nothing comes then I can look to JAN which should still have some fat IV.

  8. Phil,

    Nice to see this new trading style. Very interesting as it has so many variations and adjustments when compared to credit spread.
  9. Thanks.

    I want to reiterate that the trade I put on above is to be done with funny money. I do not like to put a lot of money into IV plays so I try and keep them low in risk/debit if I can. SO this is not a full portfolio strategy, just a way to look to exploit IV skews or extremes if possible.
  10. You seem to like the home run bets on earnings. I tend to lean toward the ATM combo to fly conversion. In any case, good luck. I look forward to stealing some tickers from you so I can cut down my research workload.:D
    #10     Oct 25, 2006