SFD - Calendar Spread Opportunity

Discussion in 'Trading' started by livevol_ophir, Oct 6, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    SFD is trading $16.48, down 0.7% with IV30™ also down 1.8%.

    <img src="http://www.livevolpro.com/help/images/blog/sfd_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 (<a href="http://livevol.blogspot.com/2010/10/sfd.html">in the article</a>) in case you want to build it yourself in Livevol Pro™.

    <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.

    Looking to the Skew Tab (<a href="http://livevol.blogspot.com/2010/10/sfd.html">in the article</a>), we can see the elevated vol in the front month (red line) relative to the second month (yellow line). I've highlighted the ATM strikes.

    <img src="http://www.livevolpro.com/help/images/blog/sfd_skew_10-6-2010.gif" width="600" />

    Now we can turn to the Charts Tab (<a href="http://livevol.blogspot.com/2010/10/sfd.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

    We can see that IV30™ is trading above both the short-term realized vol (HV20™ is 28) and the longer-term realized (HV180™ is 37).

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

    We can see that Oct vol is ~46 while Nov is ~37. This is the vol diff we're lookin' at.

    <b>Potential Trades to Analyze</b>
    1. Sell the Oct 16/17.5 strangle @0.35 or ~44.5 vol. Buy the Nov 16/17 strangle for $1.25 or ~40.5 vol. The total debit is $0.90. Note the "uneven" upside strikes allowing for a bit more upside room in Oct. The hope here is that SFD stays within [$16, $17] by Oct expo.

    2. Do trade #1, if it works out well, then sell the Nov 15/18 strangle if possible at or above $0.45. That leaves a total debit of $0.45 for a max gain of $0.55 or a 1.22:1 MaxGain:MaxLoss ratio.

    3. Other trades include selling more than 1:1 in Oct and Nov. Also, instead of buying the strangle in Nov, we can look at the 16 or 17 strangle for a slight delta bet along with the vol.

    This is trade analysis, not a recommendation.

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

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