PDE - Calendar Spreads Sits Up with Earnings Vol

Discussion in 'Options' started by livevol_ophir, Oct 5, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    PDE is trading $30.88, up 3.8% with IV30™ down 3.3%, down 3.1% with IV30™ up 2.1%.

    <img src="http://www.livevolpro.com/help/images/blog/pde_summary.gif">

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    The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

    <b>Custom Scan Details</b>
    Stock Price >= $5
    Sigma1 - Sigma2 >= 8
    Average Option Volume >= 1,000
    Industry != Bio-tech
    Days After Earnings >=5 <=70
    Sigma1, Sigma2 >= 1

    The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro&#8482.

    <img src="http://www.livevolpro.com/help/images/blog/calendar_spread_scan.gif" width="600">

    The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. 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 selling elevated front month vol simply because earnings are approaching.

    The PDE Charts Tab is included (<a href="http://livevol.blogspot.com/2010/10/pde.html">in the article</a>), just the stock portion (we'll look at vols in a sec.)

    We can see the stock has been in a strong upward trend of late going from ~$22 all the way over $30 in the last month (ish). Now, we can look to the Skew Tab (<a href="http://livevol.blogspot.com/2010/10/pde.html">in the article</a>).

    We can see the elevated vol in the front month (red line) relative to the second month (yellow line).

    Finally, let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/10/pde.html">in the article</a>).

    We can see that not only is the back month cheaper than the front, but also earnings should be in the Nov cycle (this is a projection, last earnings were 7-29-2010). Earnings are a volatility event so buying cheaper vol and getting earnings is a nice trick.

    <b>Potential Trades to Analyze</b>
    1. Buy the Nov 30 straddle for $4.20 (47 vol), sell the Oct 30 straddle @ $2.20 (~53 vol) for a net debit of $2.00. This trade needs PDE to stay in a tight range before Oct expo and loses to a takeover, big stock moves and a vol crush in Nov.

    2. Sell the Oct 29/32.5 strangle @ $0.85 (53.5 vol) and buy the Nov 29/32.5 strangle for $2.65 for a total debit of $1.80. This gives a bit more room for movement in Oct.

    3. For a directional play with vol, possible trades include just one side (just calls or just puts).

    This is trade analysis, not a recommendation.

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

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