Wednesday, May 19, 2010

Ventas (VTR) - Jun Vol Seller on Range Bound Stock

VTR is trading 46.13. The LIVEVOL™ Pro Summary is below.

Two types of trades are jockeying for position recently:
(1) Vol buyers: Those anticipating a strong market move (probably down) in the near term.
(2) Vol Sellers: Those taking advantage of what seems like high vol (VIX is in the 30's) to scalp some premium in the normally quiet summer months.

This trade is an example of (2).

The company has traded over 6,000 options in the first hour on total daily average option volume of just 810. All but 49 contracts today were a single trade (a sale of the Jun 40/50 strangle). The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that both the calls and the puts are substantially opening (new positions b/c trade volume >> open interest).

You can also see the difference in the vols between the calls and the puts. Even without looking at the skew chart (which we will), it's apparent that the upside and downside are priced differently (which is normal).

This trade is simply a bet that the stock stays above $40 and below $50 (i.e. a bet on low vol). Specifically, the strangle was sold @ $1.00 ($0.55 in the puts, $0.45 in the calls). Break even low is $39, break even high is $51.

The vol chart (using IV30™) over the last 6 months illustrates the general vol trend in VTR (click to enlarge).

We can see the vol spiked, came down, and has now risen back to its highs. The vol level appears high (for now).

Next the Skew Tab snap (click to enlarge) illustrates the specific vol levels sold relative to the others.

As we noted prior, the calls are much lower vol than the puts.

An easy way to clearly see the impact of the skew on options is just to look at prices. With the stock $46, the 50 calls are closer to ITM than the 40 puts. If vols were equal, the calls should be more expensive than the puts (this is loosey goosey for other reasons (probability measure distribution), but let's just skip that for now). We know that the trades were in fact $0.55 for the puts and $0.45 calls. In other words, a $4 OTM call is less than a $6 OTM put. That's the skew in "real" terms.

Finally, the stock chart (12 months) is below (click to enlarge).

This is the final piece to understanding the trade. The stock hasn't been above $50 in the last year (52 wk. high is $47.14), and hasn't been below $40 for about 6 months.

So the straddle sells high vol (relative to the past) in a stock that has remained range bound for quite some time. That's the rationale.

This is trade analysis, not a recommendation.

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