VIT - Time Spread and Vol Sale

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

  1. livevol_ophir

    livevol_ophir ET Sponsor

    VIT is trading $31.66, down 1.9% with IV30™ up 0.2%.

    <img src="">

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

    <b>Custom Scan Details</b>
    Stock Price &gt;= 5
    IV30™ - HV20™ &gt;= 10
    HV180™ - IV30™ &lt;= -8
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech
    Days After Earnings &gt;=10 &lt;=60

    The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). 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 IV30™ simply because earnings are approaching.

    The VIT Charts Tab is included (<a href="">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.

    <img src="" width="600">

    We can see:
    IV30™: 62
    HV20™: 52
    HV180™: 42

    So vol is elevated relative to historical short term and historical longer term. Finally, let's look to the Options Tab (<a href="">in the article</a>).

    We can see that the Oct 30 straddle is priced at about 64 vol or a $3.45 sale. The Nov 30 straddle is 62 vol (or $5.90 to purchase). I believe earnings are probably NOT in the Nov options cycle, but it's a coin flip.

    <b>Possible Trades to Analyze</b>
    1. Sell the Oct 30 straddle naked @ 3.45. Very risky and wins if VIT stock is in [$26.55, $33.45] on Oct expo.

    2. Less risky, do the straddle sale and buy the Oct 25/35 strangle for $0.70 yielding a net credit of $2.75. This trade requires VIT stock to be in [$27.25, $32.75] (a tighter range than trade #1), but limits max loss to $225. The PnL chart for this trade is included (<a href="">in the article</a>).

    3. Another trade is to sell the 64 vol Oct straddle at $3.45 and buy the 62 vol Nov 30 straddle for $5.90 yielding a net debit of $2.45. If stock stays here and vol stays here, the trade on Monday after Oct expo. looks about like this:
    Oct straddle sale @ $3.45 is worth $1.66 (parity) or a $1.79 gain.
    Nov straddle decays to $5.03.
    Net the trade "would be" worth $3.24 bought for $2.45 or a 24% gain.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, charts here:

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