Tuesday, December 14, 2010

Tesoro (TSO) - Elevated Vol and Expo

TSO is trading $16.94, down 1.0% with IV30™ up 1.0%. 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.

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 (which is normal this close to expo). There's also a parabolic bend up (upside and downside) in Dec.

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).

We can see IV30™ has risen passed HV20™ and HV180™, so it is elevated a touch. The stock has risen nicely of late, though in the last week has done a little turn down.

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

Potential Trades to Analyze
1. Start Simple:
Sell the Dec 17 straddle @ $0.69 (~54 vol).
Buy the Jan 17.5 straddle for $1.81 (~40 vol).
Net debit is $1.12. Note the offset strikes - that creates a delta to this position.

2. More complex:
Do #1, sell the Jan 15 put @ $0.21 (~42 vol). This reduces the debit to $0.91, but is naked both sides if the stock moves size in the next 3.5 days.

3. For you risk lovers:
Do #2 and sell the Dec 16/18 strangle @ $0.14 (~59 vol). This reduces the debit to $0.77. If TSO sticks around here to expo, this can probably be closed for a winner on Friday close.

Note: TSO is an independent petroleum refiner, so one day surprise moves are a real possibility. Getting overly short the $0.10 options in this one doesn't feel like a smart play. Also, the Jan options are pretty expensive. This one may be a pass overall unless you have some strong convictions.

This is trade analysis, not a recommendation.

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