I think INSP reports tomorrow. The Mays are showing IV's in the 90's while the Oct's are in the 50's. Not too familiar with this stock, but from the chart it appears to have a history of gapping on earnings. Ideas?
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INSP another big IV calendar skew
- Thread starter AAAintheBeltway
- Start date
Quote from AAAintheBeltway:
I think INSP reports tomorrow. The Mays are showing IV's in the 90's while the Oct's are in the 50's. Not too familiar with this stock, but from the chart it appears to have a history of gapping on earnings. Ideas?
Ahh, good ol' Naveen Jain. How this thing survived the bubble is beyond me.
Anyway, with regard to your question, as has been said before, a long calendar spread in front of earnings is not a great play due to the vol crush that typically hits the back month as well. So I'd stick to some kind of negative vega play on the front month only. Some favor straight short strangles or ratios, but I've been inclined to go with cheap limited risk flys these days. However, with those, the choice of strikes is the tricky part. And having not followed the stock in years, I have no clue as to where it might end up after the release.
The only edge is the vol term-structure. The problem lies in being long vega and short gamma. This thing is likely to move on the release, hurting the time spread. Also, the vols are likely to get crushed as HD points out, further hitting the spread.
The spread looks attractive now, but you have to wake up with this thing in the morning.
The spread looks attractive now, but you have to wake up with this thing in the morning.
That's a good point riskarb. Considering how juiced the May's are, I think I will look at the 40 straddle, which looks to be about 7.90 bid with the stock at 41.24.
Quote from Hello_Dollars:
Ahh, good ol' Naveen Jain. How this thing survived the bubble is beyond me.
Anyway, with regard to your question, as has been said before, a long calendar spread in front of earnings is not a great play due to the vol crush that typically hits the back month as well. So I'd stick to some kind of negative vega play on the front month only. Some favor straight short strangles or ratios, but I've been inclined to go with cheap limited risk flys these days. However, with those, the choice of strikes is the tricky part. And having not followed the stock in years, I have no clue as to where it might end up after the release.
Yeah, I was kind of surprised when it popped up on a stock screen last night, then I looked at the options and saw how rich they were. Not sure what the deal is with this stock, maybe they are getting some google effect, but it does seem to have a history of gapping strongly on the reports. Still, lot of room in the straddle and I don't see this being a TASR/RIMM type rocket.
Quote from AAAintheBeltway:
Yeah, I was kind of surprised when it popped up on a stock screen last night, then I looked at the options and saw how rich they were. Not sure what the deal is with this stock, maybe they are getting some google effect, but it does seem to have a history of gapping strongly on the reports. Still, lot of room in the straddle and I don't see this being a TASR/RIMM type rocket.
Then a short straddle would work. And you can always convert it to a fly later on to limit your risk to expiry after vega and theta have had their way with the wings.
Quote from AAAintheBeltway:
That's a good point riskarb. Considering how juiced the May's are, I think I will look at the 40 straddle, which looks to be about 7.90 bid with the stock at 41.24.
I just sold the May 45 straddle for $9.10. I was thinking about the 40, but the skew and delta position add another $1.20 for the 45.
You can sell some stock or buy a couple of June puts to reduce your long deltas in the 45 straddle.
Quote from Kicking:
I guess I missed something in the greek part but why are you selling the straddle if you think the stock might move big on earnings? Could it be that there would be a reason why IV is so high in the front month? i.e. big move coming...
The point we were making is that the vols will drop, and nothing is more sensitive to vol than a straddle.
The long time spread is long-vol, and any move(gamma) coupled with the drop in vol will be damaging to the time spread.
I think the stock will move; the bet is: (gain from vega) > (loss from gamma)
Quote from Kicking:
I guess I missed something in the greek part but why are you selling the straddle if you think the stock might move big on earnings? Could it be that there IS a reason why IV is so high in the front month? i.e. big move coming...
Kicking thats a good point regarding the front month IV's. In my experience, front month vols, even when they are pumped, are almost always undervalued and in theory should be bought and not sold. However, depending on the stock and the situation this play could be done correctly. I looked at this baby too a few weeks ago along with OSIP and I came to the same conclusion that I did with OSIP. This bitch is going to break hard one way or the other. If I sold the straddle I would definitely be leaning some long or short stock. The problem is, I couldn't decide which way to lean and therefore passed this one up. There are a few better plays out there right now with much better vol structures and greeks then this one with about 10% of the risk.
A big part of this game is not just putting on the right trade but knowing when to pass. I would pass on this one. However I could be completely wrong and it might just open down 2 pts. But there are far juicier plays out there right now then this one which makes it a mute point regardless.