Tuesday, December 7, 2010

Stillwater Mining (SWC) - Calendar Vol Spreading

SWC is trading $21.71, down 3.3% with IV30™ unched. The LIVEVOL™ Pro Summary is below.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months. I actually like both sides of this trade; the vol sale and the vol purchase. Details below.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. 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 front month vol simply because earnings are approaching.

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

We can see how the front month is elevated to the back. I've highlighted the ATM strikes and the gaping vol diff which is approximately 18 vol points wide.

Now we can turn 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).

I've indicated with the yellow line the level of the Dec options (~78 vol) and the Jan options (~59 vol).

Dec IV: 78
HV20™: 71.41
HV180™: 64.44
IV30™: 62.76
Jan IV: 60

Like yesterday's post on FSLR, the Dec vol and Jan vols look like reasonable trades to analyze on their own. When taken together, they make a nice little pair.

Note that the stock has run up of late from ~ $19 to now over $21.70 in the last few days.

Finally, let's look to the Options Tab (below).

Potential Trades to Analyze
1. Sell the Dec 22 straddle @ $2.15 (75 vol).
Purchase the Jan 22.5 straddle for $3.80 (56 vol).
Pay $1.65.

2. Sell the Dec 21/22 strangle @ $1.70 (77 vol).
Purchase the Jan 21/22.5 strangle for $3.00 (60 vol).
Pay $1.30

3. Do some call or put spreads month-to-month:
Dec/Jan 23/22.5 call spread.
Dec/Jan 20 put spread.
Or whatever catches your fancy.

4. Do just one side. Just sell Dec or just purchase Jan.

This is trade analysis, not a recommendation.

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