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The company has earnings in two days BMO. Yesterday, the company traded over 17,000 options on total daily average option volume of just 3,854. The action was in Nov: Nov 50 call buyer, 55 call seller and 46 put buyer. So there is an overall premium long accumulation. The Stats Tab and Day's biggest trades snapshots are included (below).
The Options Tab (below) illustrates that both the 50 and 55 calls as well as the puts are mostly opening (compare OI to trade size). We can see that Nov vol popped 4.9 points while Dec was up 2.4.
The Skew Tab snap (below) illustrates the vols by strike by month.
We can see the classic front month elevated vol into earnings. Other than that, the skew looks pretty nice. Looking to the stock behavior (below) for CSTR after earnings, we can see it can move fairly substantially.
Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).
We can see a rather impressive vol divergence between the implied and either of the two historicals (short-term and long-term). Last earnings a similar patten evolved - the market is definitely sensitive to the big move potential for this stock on earnings.
Possible Trades to Analyze
The vol is high, but for a reason. Selling the ATM straddle @ $5.60 feels high given it hasn't moved more than in 7/8 earnings cycles (but those are just one day moves). I guess that's sort of fair value when looking at prior cycles through expiration.
1. If you have a delta bet on this thing, doing the one dollar call (or put) spread for anything less than $0.50 feels like a pretty reasonable (or better than reasonable) bet. The problem is, you'd have to be right on the delta direction.
2. The Nov 40/41 1x2 put spread (buy one 41 sell two 40) for a $0.50 credit might be a play simply on the high vol and sharp skew while essentially trying to stay out of the way of the stock move. Naked downside though...
Other than that, I think this name is ok to trade with a delta bet and being contract neutral, playing both sides feels expensive but selling naked vol could be a touch too risky.
This is trade analysis, not a recommendation.
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Ophir,
ReplyDeleteInstead of spread isn't condor with price<1 better? No need to guess where the stock is heading... You can do condor 45-46-47-48 for 0.9 so if someone doing many commissions will not add up much...
sure, that's a possibility, but it requires the stock to move nearly twice as much ($0.90) compared to a spread alone (~$0.50). But that's certainly one way to play it.
ReplyDeletehI oPHIR
ReplyDeleteJust wondering what you think of the Nov 41put 50call strangle for a total debit of $2.65
The IV is telling us that there is going to be a big move (greater than $5+2.65 by expiration...although im doing this as a one day trade so I should be ITM regardless tomorrow AS long as this thing moves $7.65. Lemme know what u think. Thanks.
Hi Ayush,
ReplyDeleteI can't really comment on a specific trade, that crosses the line of advice. I would say that buying vol into earnings is definitely risky. I see the ATM (46) straddle right now implying about a $5.90 one std dev move which is a touch less than what your strangle requires to make money in parity, though, it could make money for the one day depending on the vol. As long as you're comfortable with the risk:reward and feel like you have edge, then go for it. Otherwise, of course, pass on the trade.