RDN - Depressed Vol into Earnings

Discussion in 'Options' started by livevol_ophir, Oct 11, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    RDN is trading $8.61, down 3.4% with IV30â„¢ up 2.3%. The <a href="http://www.livevol.com/">LIVEVOLâ„¢ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/10/rdn.html">in the article</a>.

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

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    I found this stock using a real-time custom scan. This one hunts for low vols.

    <b>Custom Scan Details</b>
    Stock Price &gt;=$7 &lt;= $70
    IV60â„¢ &gt;= 1
    IV60â„¢ - HV60â„¢ &lt;= -8 &gt;= -40
    HV180â„¢ - IV60â„¢ &gt;= 8
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech

    The snapshot of the scan is included (<a href="http://livevol.blogspot.com/2010/10/rdn.html">in the article</a>) in case you want to build it yourself in Livevol Proâ„¢.

    <img src="http://www.livevolpro.com/help/images/blog/low_vol_60_scan.gif" width="600" />

    The goal with this scan is to identify intermediate-term implied vol (IV60â„¢) that is depressed both to the intermediate stock movement (HV60â„¢) and the long term trend in stock movement (HV180â„¢). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume) and want to avoid bio-techs (and their crazy vol).

    The RDN Charts Tab (vol only) is included (<a href="http://livevol.blogspot.com/2010/10/rdn.html">in the article</a>). IV60â„¢ - yellow vs HV60â„¢ - blue vs HV180â„¢ - pink).

    We can see:
    IV60â„¢: ~68.63
    HV60â„¢: 80.62
    HV180â„¢: 89

    So, IV60â„¢ is depressed relative to the intermediate term and long term realized movement of the stock.

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

    We can see that the Nov 7.5/9 strangle is priced at ~73 vol with earnings projected to be in the Nov cycle. RDN historically does have a tendency to be a better sale of vol than purchase into earnings (the one day straddle trade).

    <b>Possible Trades to Analyze</b>
    1. Buy the Nov 7.5/9 strangle for $1.05. This requires RDN to be outside of [$6.45, $10.05] on Nov expo.

    2. Do #1, but sell the Nov 10 calls @ $0.35, netting a $0.70 debit. This requires that RDN be outside of [$6.80, $9.70] on Nov. expo. However, this does limit the upside win to a takeover or big move up.

    3. If you have a directional bet, one side of the strangle is reasonable.

    4. #3, but first sell the Oct 9 calls @$0.10. If the stock is below the strike on Oct expo (i.e. this Friday), then sell the Nov 10 calls. This could limit the debit to just $0.60, though it carries it's own risks and selling $01.0 options is really a great strategy all of the time.

    5. Skip Nov, look at the Jan'10 options. That same strangle is priced ~68 vol. Perhaps Jan'10 is the better vol play.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/10/mtb.html">http://livevol.blogspot.com/2010/10/mtb.html</a>

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  2. Nine_Ender

    Nine_Ender

    I follow RDN because it went to 0.01 on the flash crash ( from $10 ) and they lose hoards of money every year. I think long term they may go bankrupt, but the options are very expensive. I see the estimates for losses have shrunk so if they miss again badly this stock is toast.

    If anyone knows a reason why this company may turn around please post.