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I found this one searching through the Calendar Tab looking for a pharma/bio-tech with earnings approaching. Why would I do such a thing?... I like the small bet, big reward you can sometimes find in the high vol bio-techs on earnings. Trades which have a high probability of losing, but ones where the payout may in fact be greater than the bad odds.
First, let's look to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).
As expected, we can see elevated IV30™ coming into earnings. The ATM straddle in Nov is actually priced at 100 vol (10 points higher than the IV30™). I have also highlighted the last earnings cycle for AMAG where it moved huge in the two days following earnings (about $7 down).
For completeness, let's look to the Skew Tab (below).
Again, as expected, we can see a massive divergence between the Nov and Dec. Nothing necessarily "unusual" here.
Ok, now to the Options Tab (below). You'll note that there isn't a lot of trading in there right now, which isn't good in terms of liquidity, but what the hell, let's investigate a little gamble here.
Possible Trades to Analyze
Ok, here's the long shot, both in terms of getting an execution and then in terms of actually winning to it.
1. Do the Nov 19/20/21 call butterfly paying $0.10. This yields a max loss of the debit or $0.10 (excluding commissions and pin risk) and a max gain of $0.90. 9:1, decent. How about this....
2. Ok, Sell the Nov 20 straddle @ $3.90 ($1.85 in calls, $2.05 in puts). Buy the Nov 19/21 strangle for $2.95 ($1.40 in calls, $1.55 in puts). That leaves a net credit of $0.95 and max loss of $0.05, with max gain $0.95. Oooo, 19:1, that's nice.
With both these trades there is execution risk, and both are most likely losers. But... the butterfly (or condor) for 19:1 payout, feels like a small little bit that may be worth throwing the dice on... small...
Just to be clear, these trades for $0.15 or even $0.10 have a vastly different MaxGain:MaxLoss ratio, so a nickel difference is huge here. I intended this more as an example of what to look for in bio-techs on earnings. You'd be surprised at the prices you can get.
This is trade analysis, not a recommendation.
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both are credit trades, right? why do you call them net debit?
ReplyDeleteThese trades cost money. If you can do a butterfly for a credit, it's an arbitrage.
ReplyDeletefirst - yes, but 2. sell for 3.90 buy for 2.95?
ReplyDeleteor i'm missing something?
You are correct about trade #2. I will fix now, ty Alexey.
ReplyDeletegood :) cause when I saw a credit quote of 0.95 instead of .05 debit I thought for a sec that it's my last day before retirement :)
ReplyDelete