Kmrt

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AAAintheBeltway

This name has been on a roll and is up sharply today on news it is selling some store sites to HD. The IV's over the past few months have ranged from 60's to low 40's, high for a retailer, and are now in the high 40's.

I like selling the July call ratio spread using the 55's and 65's on a 1:3 ratio. You are out maybe a buck or so and have a wide profit range. Somewhat delta negative. Comments?
 
Quote from AAAintheBeltway:

This name has been on a roll and is up sharply today on news it is selling some store sites to HD. The IV's over the past few months have ranged from 60's to low 40's, high for a retailer, and are now in the high 40's.

I like selling the July call ratio spread using the 55's and 65's on a 1:3 ratio. You are out maybe a buck or so and have a wide profit range. Somewhat delta negative. Comments?
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1x3's are dangerous... best to stick with a 1x2 if possible. Yeah, the implieds are high, but so is the stat-vol.
 
Quote from AAAintheBeltway:

This name has been on a roll and is up sharply today on news it is selling some store sites to HD. The IV's over the past few months have ranged from 60's to low 40's, high for a retailer, and are now in the high 40's.

I like selling the July call ratio spread using the 55's and 65's on a 1:3 ratio. You are out maybe a buck or so and have a wide profit range. Somewhat delta negative. Comments?
More...

Yeah, the implieds are right smack in the middle of the range. So nothing very exciting from a vol standpoint. If you have a directional view, I'd stick with the stock on this one. If not, I'd pass altogether.
 
Quote from Hello_Dollars:

Yeah, the implieds are right smack in the middle of the range. So nothing very exciting from a vol standpoint. If you have a directional view, I'd stick with the stock on this one. If not, I'd pass altogether.
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I think the vols have been juiced significantly because of all the news on this stock over the past year. It made a huge move Friday and is likely to consolidate for a few weeks. There is gamma risk but the stock would have to rally another 20%.

Maybe there is a better way to play this, but I thought this trade offered some decent upside without enormous real world risk.
 
Quote from AAAintheBeltway:

I think the vols have been juiced significantly because of all the news on this stock over the past year. It made a huge move Friday and is likely to consolidate for a few weeks. There is gamma risk but the stock would have to rally another 20%.

Maybe there is a better way to play this, but I thought this trade offered some decent upside without enormous real world risk.
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No, there is a TON of gamma risk in the 1x3 with a 10% increase in the shares. 20% move would kill this trade. You're essentially long a 1-lot bull vertical; short 2 naked calls. The delta and gamma position in the vertical here will not compensate on the upside gamma-risk.

If it can't be done as a 1x2 with a favorable r/r then it's not worth doing. Unless you're simply looking for a short-sale proxy -- and a very weak one at that.

It's simply a short delta(gamma) position.
 
riskarb,

I hear you. Thanks. How do you decide when there is too much negative gamma in a position? I've always been uncomfortable with gamma exposure, but I'm trying to expand my trading to include it.
 
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