Calendar trade from Maverick

M

Maverick74

Here is an interesting calendar swap trade that presented itself on Friday. The stock is OTVI. It went out at 48.53. There is a really nice front month skew on this play. The Feb's are trading at a 30 pt premium to the back months. The front month vol is around 96 to 97 and the sept vol's are around 61 to 65.

The play on Friday was to sell the Feb 50 calls at 96 vol, sell the Feb 40 puts for a 97 vol and buy the Sept. 50 calls for a 61 vol and buy the Feb 40 puts for a 65 vol. The breakevens at expiration on Friday are 39.80 and 54.40. That's a pretty sweat range.

The spread went out on Friday 10.90 bid by 11.40 offer. The low of the spread was 11.20 and the high was 12.30.

The probability of profit on this trade is 88%.

The breakevens on this trade are outside the first standard deviation on both sides.

The probability of the stock finishing below the low of the range is 1.2%. The probability of the stock finishing above the high end of the range is 10.5%.

Also the stock is reporting earnings on Wednesday.
 
The play on Friday was to sell the Feb 50 calls at 96 vol, sell the Feb 40 puts for a 97 vol and buy the Sept. 50 calls for a 61 vol and buy the Feb 40 puts for a 65 vol. The breakevens at expiration on Friday are 39.80 and 54.40. That's a pretty sweat range.
Maverick
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Good suggestion. However, for clarification, do you mean to "buy the Feb 40 puts for a 65 vol" or possibly buy the Sep 40 puts for a 65 vol?
 
Quote from Doubter:

The play on Friday was to sell the Feb 50 calls at 96 vol, sell the Feb 40 puts for a 97 vol and buy the Sept. 50 calls for a 61 vol and buy the Feb 40 puts for a 65 vol. The breakevens at expiration on Friday are 39.80 and 54.40. That's a pretty sweat range.
Maverick
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Good suggestion. However, for clarification, do you mean to "buy the Feb 40 puts for a 65 vol" or possibly buy the Sep 40 puts for a 65 vol?
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Yeah sorry, typo on my part, buy the Sep 40 puts, not the Feb40 puts.
 
Quote from Maverick74:

Here is an interesting calendar swap trade that presented itself on Friday. The stock is OTVI. It went out at 48.53. There is a really nice front month skew on this play. The Feb's are trading at a 30 pt premium to the back months. The front month vol is around 96 to 97 and the sept vol's are around 61 to 65.

The play on Friday was to sell the Feb 50 calls at 96 vol, sell the Feb 40 puts for a 97 vol and buy the Sept. 50 calls for a 61 vol and buy the Feb 40 puts for a 65 vol. The breakevens at expiration on Friday are 39.80 and 54.40. That's a pretty sweat range.

The spread went out on Friday 10.90 bid by 11.40 offer. The low of the spread was 11.20 and the high was 12.30.

The probability of profit on this trade is 88%.

The breakevens on this trade are outside the first standard

deviation on both sides.

The probability of the stock finishing below the low of the range is 1.2%. The probability of the stock finishing above the high end of the range is 10.5%.

Also the stock is reporting earnings on Wednesday.
More...

For obvious reasons(earnings) the smile is evident, but...

The b/e on the spread assumes that the vols won't get absolutely crushed, which they will after earnings. There is good edge in the spread, but not enough premium in the Febs, even with the smile edge that debit is ridiculous. I'd gather it loses a point on each side immediately after earnings -- the spread is all Sep in terms of debit, regardless of the smile edge.

I'm not flaming the trade, simply that I've seen the vast majority of these long-vega smile trades implode volty on earnings, typically more in aggregate than is earned from the edge in volty-smile.

riskarb
 
Quote from riskarb:

For obvious reasons(earnings) the smile is evident, but...

The b/e on the spread assumes that the vols won't get absolutely crushed, which they will after earnings. There is good edge in the spread, but not enough premium in the Febs, even with the smile edge that debit is ridiculous. I'd gather it loses a point on each side immediately after earnings -- the spread is all Sep in terms of debit, regardless of the smile edge.

I'm not flaming the trade, simply that I've seen the vast majority of these long-vega smile trades implode volty on earnings, typically more in aggregate than is earned from the edge in volty-smile.

riskarb
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Yes, normally I would agree with you about this and for the most part, I hate holding on to long vega through earnings because volatility does get smoked however, as I have said before, vol comes in relative to the amount that it goes up into earnings. It doesn't just come in for coming in's sake. Look at the statistical vol on this stock. This stock is a very very crazy stock and tends to spurt all over the place.

Also this stock is getting crushed right now and may continue to do so. Also the lowest the vol has ever been is around the 55 level. Well, your buying 60 vols on the back month. So let's just say hypothetically, that the back month vols come in 500 basis points to their all time lows again. Your breakeven is now 46.40 to 52.

See the problem with this stock is the MM's really can't bring in the back month vol's that much, that is why they have not gone up going into earnings. The front month vols are going to come in 30 pts at least. But they have not skewed the back months up. This stock is just too crazy. It has 5 pt ranges and drops 10 pts out of nowhere.

But ideally, you don't want to do calendars around earnings if only for the fact that it's hard to handle the price gaps. This stock tends to move in 5 pt increments all the time so that makes this stock somewhat of a challenge for the newbie trader.

But for those that are interested, I have about 30 other plays I have found similar to this one only you don't have to hold them through earnings. I have a proprietary filter that finds these and for those of you that trade calendars, these are good plays. I don't trade calendars that much anymore because I don't have to worry about reg T margins, but for those of you with that restriction, calendars are great trades.

BTW, even with a 500 bp drop in vol on the back months, you can still yield a 10% profit in one weeks time. Not bad.
 
Mav,

Why go all the way out to Sep and incur that big debit? The skew between Feb and Mar is 40-50 today. Is there some reason to avoid the near term calendar?
 
Quote from AAAintheBeltway:

Mav,

Why go all the way out to Sep and incur that big debit? The skew between Feb and Mar is 40-50 today. Is there some reason to avoid the near term calendar?
More...

No reason, just higher theta. If you don't want the extra theta, the closer months would suffice. Also the vols are pretty cheap that far out and are less vulnerable to a vol implosion after earnings.
 
A bit off topic but in reference to Implied Volatility. If I check the IV for a CALL or PUT on IB, Optionsxpress, IVolatility.... all three will be different.

For example, right now, IB has the OVTI Feb 50 Put at 118+, OptionsXpress has it at 131+, and IVolatility has it at 91.33%.

Why would the values be different?
 
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