Wednesday, May 12, 2010

McDermott International (MDR) - Summer Vol Seller

MDR is trading 26.35, up 4.7% with IV30™ down 10.5%. The LIVEVOL™ Pro Summary is below.

The company has traded over 12,000 options in the first four hours on total daily average option volume of just 2,556. The biggest trades have been straddle sales in Jun. 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 calls and puts are both mostly opening short positions (volume > OI). You can see the straddle is about 40 vol, down 4 vol points today as the stock rises with the market. Back to the vol sale in a sec...

The Skew Tab snap (click to enlarge) illustrates more clearly what vol is being sold (relative to the rest).

I have highlighted (circled) the Jun 26 line - you can see Jun is low relative to the other three months. Note, this stock has earnings in the Aug cycle (projected), so Aug should be higher.

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.

A couple things jump out at me here:
1) In the upper half - the stock dropped hard (with the market) and has recovered just as abruptly (called a "V" for obvious reasons).

2) In the bottom portion, we can see the vol spike (also like the rest of the market) and then dip.

This straddle sale is $1.25 (puts) + $1.375 (calls) = $2.625 (call it $2.60).
Expiration Details:
1) Max Gain Price: $26
2) Max Gain Amount: 4,000 * 100 * $2.60 = $1,040,000
3) Breakeven Low: $23.40
4) Breakeven High: $28.60
5) Max Loss: "Unlimited"

Or in English... This strategy makes money if the stock stays in the range of ($23.40, $28.60) using $2.60 as the sale value.

This is another blog post where people are selling vol in the summer.

Summer tends to be a dead time for stocks - and therefore vol goes down. The selling has started a touch early this year possibly b/c the vol is so elevated from the recent market turbulence. Since people are selling vol earlier, they are selling Jun options rather than the customary Aug options.

I think this trend will continue. Only time will tell if it turns out to be a winning approach.

This is trade analysis, not a recommendation.

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