Alliance Data (ADS) - Huge Vega Sale on Highly Elevated Vol

ADS is trading $56.64, down 4.8% today with IV30™ up 6.6%. The LIVEVOL™ Pro Summary is below.



The company has traded nearly 18,000 options in the first three hours on total daily average option volume of just 1,888. All but 2,156 contracts have been puts yielding over a 7:1 put:call ratio. The largest trade was 13,290 Sep 50 puts crossed electronically on the bid on CBOE; I believe that to be a sale. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).





The Options Tab (click to enlarge) illustrates that the puts are opening (compare OI to trade size). I don't see any line in the front three months with more than 2,500 OI, so 13,290 is really big for this company.



The trade printed at 10:45 EST. When I looked up Time & Sales for the stock, I see a 318,960 lot traded at 10:46 EST (i.e. one minute later). I have included the snap (click to enlarge).



The exchange reported the stock trade as "Regular," but it printed more than $0.50 out outside of the NBBO. The PnL chart is included below, but I am using $57.83 stock (the stock value according to the option trade) rather than the price the exchange reported which seems erroneous.

Trade Stats
Sell 13,290 ADS Sep 50 puts @ $2.30
Sell 318,960 ADS stock @ $57.83
That number shares works out to a 24 delta.
Max Gain (at $50 at expo): $5,554,157
Breakeven Low: $44.50
Breakeven High: $67.41



This trade is short $112,965.00/vol. In other words, each vol point carries over $100,000 in PnL. Note that vega is not constant (the second derivative of price with respect to vol is not zero). Let's get back to the vol in a sec. First the skew tab.

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month.



Pretty normal lookin' skew.

Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.



We can see a sharp price decline and the IV30™ (red line) moving well above the HV20™ (blue line).

I have also included the vol chart of HV90™ (dark blue line) vs. the IV90™ (green line).



Note how far the implied (green) is trading above the historical (blue). The Sep options correspond more closely to the IV90™ than the IV30™ if looking to expo. Either way, this trade sells highly elevated vol in a stock that has dropped hard recently. The trade does have room for another ~$9 of stock drop before it loses money.

This is trade analysis, not a recommendation.

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