SHOO - Skew Scalping

Discussion in 'Options' started by livevol_ophir, Apr 30, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    SHOO is trading 57.84 up $2.21 with IV30&#8482 up 10% and earnings next week (Tuesday BMO).

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    The company has traded over 4,600 options today on total daily average option volume of just 330 (or 14x daily average) . The largest trade was a May 55/65 risk reversal (sell calls / buy puts) paying $ 0.80. The Stats Tab and Day's biggest trades snapshots are included (<a href="">in the article</a>).

    The Options Tab (<a href="">in the article</a>) illustrates that the calls and puts are opening - volume is well above the open interest.

    The Skew tab snap shows a nice little trade - selling upside calls for the same vol as the downside puts - something you don't usually get to do. I've highlighted the relevant strikes (<a href="">in the article</a>).

    This is actually a fairly common trade - a stock runs up, vol goes up with it into earnings making puts "cheap" relative to calls (in this case when call iv = put iv on the skew chart - that's "cheap"). To read why OTM puts are usually more expensive then OTM calls (i.e. why skew exists) you can go: <A href="">Here.</a>

    If the trader is long the stock they have bought downside protection for "cheap" while selling covered calls for "expensive." Not bad and possibly something to think about over the weekend.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews here: