* UPDATE: GYMB - Update and Vol Trades

Discussion in 'Options' started by livevol_ophir, Oct 4, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    GYMB is trading $48.33, down 3.1% with IV30™ up 2.1%.

    <img src="http://www.livevolpro.com/help/images/blog/gymb_summary_10-4-2010.gif" />

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    I wrote about this company last week (10-1-2010). You can read that article here: <b><a href="http://livevol.blogspot.com/2010/10/gymb.html">Gymboree (GYMB) - Stock and Vol Explode on Potential Sale</a></b>

    The stock also just came up on a real-time custom scan. This one hunts for calendar spreads.

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

    The snapshot of the scan is included (<a href="http://livevol.blogspot.com/2010/10/update-gymboree-gymb-update-and-vol.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.

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

    We can see the stock ripped a few days ago when I wrote the post. Up because of the news that they were putting themselves up for sale. Now, we can look to the Skew Tab (below).

    <img src="http://www.livevolpro.com/help/images/blog/gymb_skew_10-4-2010.gif" width="600" />

    We can see the elevated vol in the front month (red line) relative to all the other months.

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

    <b>Potential Trades to Analyze</b>
    Doing a calendar in a stock with this news out there is actually quite risky. Getting long vega (buying the back/selling the front) can turn into a trade where all of the premium gets lost (i.e. max loss is actually realized) if there is a takeover. Having said that, here are a few trades, some very risky, others a touch less.

    1) The most risky: Sell something in Oct naked. Maybe a 47/50 strangle @ $2.35. This requires GYMB to be in ($44.65, $52.35). This feels like a great wide range, until we realize the stock moved more than $8 in a day last week. A 47/55 strangle @ $1.50 yields less of a credit but is also safe all the way to $56.50 on the upside while giving back some downside protection.

    2) A spread inside the same month (i.e Oct) could work as well. Selling something closer to the money and buying a strangle outside that creates a credit with a known max. loss. For example, selling the Oct 47/50 strangle @ $2.35 and buying the Oct 45/55 strangle for $1.00 yields a $1.35 credit. Max loss is over $3.50 though, so beware of the MaxGain/MaxLoss ratio &lt; 1.

    3) Finally, a time spread. Risky, but with defined max loss. Swapping straddles or strangles essentially bets the stock stays put AND the news doesn't come out until after Oct. expo. All told, this is a risky play however you go about it - it's a spec play, not an investment imho.

    This is trade analysis, not a recommendation.

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

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