Some of your comments are confusing and I think it is just that you wrote them too quickly without more detail. 1. "There is no such thing as vols spike in the front months and not in the back." Hmm that is strange since we see repeated situations where the current month spikes up on a pending FDA announcement or major earnings release. That is why many do calendar spreads where the skew can be 20 - 40% between front and back months. So on its own there is evidence to the contrary. Maybe what you meant is that it is unlikely the front month would spike from 40 - 70%, for example, and the back month would stay flat at 40? Because that is what I expect to happen and why I have gone out longer in time with my longs to max my vegas out as much as possible and also give me time for directional moves. With such high vegas I do not need the back months to spike. I actually test the positions with minor IV increases to see the profit affect as a factor in placing the trade. 2. "The reason SHLD's implieds went to 72 has nothing to do with vols increasing." SHLD's jump in vols has nothing to do with vols increasing 3. "On Thursday, all else being equal the implieds will go over 90 while vols may actually decrease." So the vols will go over 90 but the vols will actually decrease?????????? Ok clear as mud. 4. "Doing a long vega bet based on this "spike" is crraaazzzzyyyyy but carry on." Let's try something different from the SPX thread were people actually add something for learning purposes. To just stand on the platform and say the position is crazy, especially given the ambiguity and contradictions in the previous posts adds not one thing at all and actually serves to confuse the subject. So maybe you left out something to make the point you were making. But to go long back months and short front months does not seem a crazy way to play vols at all, even Cottle would agree I am sure there was a point in there, but unfortunately you did not make it. I want this thread to be constructive and not just have attacks on the strategy (tone= light-hearted)
How about BCSI ? This stock usually has the earning announcement near to the Feb, May, Aug and Nov option month expiration date or right after that. The next one will 20 Nov which is after the Nov expiration month. From ivolatility.com, the IV range of 1 year is in the range of 50-75%. On 15 Nov, the IV is around 67% for Dec contract. Of course, it is too late for this round, can always eye for next earning cycle. Separately CWTR, DAKT, JLG, DY and NTAP which usually annouces the earning around this period also looks potential.
JOYG has 1 year IV range of 40-65% and will have the next earning announcement on 18 Dec 2006. Currently on the low end of IV. BBOX has 1 year IV range of 30-55% and will have the next earning announcement on 7 Dec 2006. Currently on the low end of IV as well. Any comment ?
RIMM @ $133 and position has profit of ~ $4,000 so far. 10% on actual net debit but since I use haircut margin (which for this position is ~ $1,000, the margin return is much higher- I will use reg t margin requirements for simplicity here and ease to follow). The position is currently +$312.00 deltas. I could short 300 shares and lock in a minimum of $2,400 profit at DEC expiration with potential for much more to the upside and downside.. Will hold off on adjustment for now.
I left out another adjustment. If I simply sell 4 of the MAR $120 Calls currently at $22.15 I bring in some nice premium and lock in a minimum profit of $3,300 at DEC expiration. I will see if RIMM has more upside and then possibly lock in a profit until DEC expiration.
RIMM @ $138 or so today. I sold 4 MAR $120 Calls @ $25.00 to bring in $10,000 in premium and reduce my cost basis as well as lock in a minimum profit of about $3,000 at RIMM DEC expiration. The position will still make more money if the stock continues to move in either direction and/or vols increase over the next 6 weeeks. I can still adjust the ITM DEC calls to JAN if I want and keep the position moving forward. UPDATED POSITION RIMM @ $138 BTO 15 RIMM MAR $120 Calls @ $11.80 ---->Sold 4 Calls @ $25.00 NET 11 Calls STO 6 RIMM DEC $125 Calls @ $3.60 STO 6 RIMM DEC $105 Puts @ $1.30 BTO 15 RIMM MAR $120 Puts @ $10.40
New Position on FFIV: FFIV @ $72.55 BTO 16 APR $75 Calls @ $7.40 STO 5 DEC $75 Calls @ $1.70 STO 8 DEC $65 Puts @ $0.50 BTO 21 APR $70 Puts @ $6.10 Vols are at lowest percentile and stock has bounced between ~40% and 55% vols at different times. The different strikes and ratio of contracts was to get delta neutral while being very long vega. If vols move 10 points higher alone I can get out without any stock moves. Gave myself time to be right on the price swings.
New position on MSTR: MSTR @ $125 BTO 15 APR $125 Calls @ $12.30 STO 7 DEC $125 Calls @ $4.60 STO 6 DEC $120 Puts @ $1.90 BTO 15 APR $125 Puts @ $9.90 Nice vol swings off of bottoms and really nice price swings. perfect combination for this type of strategy.
I like the concept of the strategy--what do you do to determine the odds of a company being acquired? Just this month, I got hurt on a calendar when PLAY was acquired. RIMM, FFIV, MSTR all seem ripe for acquisitions on the surface.
Actually you are highlighting the one real black swan risk for any individual positions, vols go to 0% and price gets locked in (in a buyout situation). the good news is that all buyouts are for a premium so my safeguard is that the stock will have some type of move towards the buyout price and I can get out with a profit or small damage. The other failsafe which could occur in a rare situation is when the buyout is not certain and vols ramp up as people speculate on whether the deal goes through or falls apart. I think that in the rare situation where a buyout occurs I still have some ways of mitigating the potential damage and even profiting on uncertain deals. But the idea is to spread out on many positions so I can not get too hurt on one and cover it if needed. EDIT: to clarify what I mean about a move if the buyout is announced at a premium is that one of the selection criteria I use is that the risk graph does not have super wide breakeven points. I reject many candidates where the risk graph requires the underlying stock to make a very large uncharacteristic move by the short expiration to be profitable assuming vols are constant. It kicks out some good volatility plays but I need vols and direction for maximum profit potential. So if a position needs a 2sigma move based on current vols I tend to avoid them if I can. Only saving factor is if I can get really high vegas and I expect a vol increase, then I will consider it a pure vega play in the short-term.