TS - Trading the Skew and the Stock Chart

Discussion in 'Options' started by livevol_ophir, Aug 16, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    TS closed $35.12 on Friday.

    <img src="http://2.bp.blogspot.com/_hMry1m7UF10/TGk-bS0BDDI/AAAAAAAAEHE/KhTwFGE_m3w/s1600/ts_summary.gif">

    The company traded over 5,100 options on total daily average option volume of just 734. 5,000 contracts went up on a Sep 30/40 risk reversal (sell puts/buy calls) 2,500x The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/08/ts.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/08/ts.html">in the article</a>) illustrates that both sides were substantially opening (compare OI to trade size). It sold 44 vol and bought 34 vol as it bough the cheap side of the skew and sold the expensive.

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/08/ts.html">in the article</a>) illustrates the vols by strike by month.

    You can see the Sep skew is quite pronounced allowing for that 10 point vol difference (sell higher than bought). That same risk reversal in Dec, according to the skew tab above, is just a six point vol difference.

    Finally, the Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/08/ts.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    Two things that stand out to me:
    1) The IV30&#8482 (red line in bottom chart) and the HV20&#8482 (blue line in bottom chart) are right on top of each other. All else equal, this implies "fair" vol in Sep.

    2) The stock has this imaginary floor at around $30; precisely the strike that was sold.

    I like that this trade made use of a pronounced skew in Sep. and seems to be using the stock chart as a guide for which options to trade (if you're into charting). The vol is essentially fair value. This could be a nice trade if you have any reason to be bullish in TS.

    This is trade analysis, not a recommendation.

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