Custom Scan Details
Stock Price >= 5
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 <=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 (click to enlarge). 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.
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 (click to enlarge).
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.
Possible Trades to Analyze
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 (click to enlarge).
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.
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I like #2, but is it possible to guess somehow based on information available what is the probability of the stock to stay within [$27.25, $32.75] in 3 weeks? Thanks!
ReplyDeleteThere is a rough way using the log normal distribution and using the implied vol of the options as the "std deviation." Of course, the trade tries to bet that the std deviation "will be" lower than the options imply, so that sort of defeats the purpose of the probability analysis.
ReplyDeleteJust another diclaimer here: I am not recommending these trades. This blog is a teaching tool and analysis, not recommendations.
Well, I'm not taking posts as recommendations to trade either, just really interested in methods you apply to analyze possibilities. My concern while I'm learning stuff that is it seems to be no reliable math methods of guessing of the outcome of the trade. Like if (case#2)it is known, that at 50% probability stock will pin at 30 on expo in Oct and 50% that it will out of [$27.25, $32.75] range than mathematical expectation is positive for the trade given max loss is less than credit and equal probabilities of 50%. As there is a no(?) way to calculate exactly the probabilities, I wonder how pros going around it other than plain throwing darts...
ReplyDeleteIf you back out the probabilities using he iv of the trade, it should come out exactly to fair value (and the you lose to commissions and slippage). The trick is to find vols you believe are "not correct."
ReplyDelete