RDWR - A Cheater and a Trade Going Forward

L

livevol_ophir

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RDWR is trading $35.69, up 0.9% with IV30&#8482 down 1.0%.

<img src="http://1.bp.blogspot.com/_hMry1m7UF10/TJtlUlFZlfI/AAAAAAAAE8c/R7dEySXmQeU/s1600/rdwr_summary_9-23.gif">

I first mentioned this stock on 9-14-2010. You can read the post here:<b><a href="http://livevol.blogspot.com/2010/09/rdwr.html">
Radware (RDWR) - Stock Explodes Mid-day on Rumors; Someone Knew...</a></b>

It turns out an Israeli newspaper posted a rumor of $43 takeover price, the it took about half an hour to get translated into English. So no foul play, best I can tell on that day.

But...

I have some trade analysis in this post, but just to stoke the flame of a possible cheater, check this out. On 8-19-2010 (nearly a month before the "rumor" announcement), someone tried to purchase thousands of the Mar 35 calls for $0.55 against an NBBO of $0.10 x $0.50. This is against a stock price of ~$23.00 and at the time, a 52 wk high of ~$24. I have included the trades from that day. The call buyer was only filled on ~1,500 calls (<a href="http://livevol.blogspot.com/2010/09/rdwr_23.html">click to see the trades in the article</a>). Note volume traded in one trade was larger than the entire daily average at the time.

As of today, those calls are worth ~$5.00, the OI is 1,750, so there you go. That's 10x the money in one month. Bottom line, I do feel like this was a cheater, but it's just one opinion of many.

On to the reality of today... The stock hasn't had any confirming news, and now there may be a trading opportunity, albeit risky.

First, let's look to the Charts Tab (<a href="http://livevol.blogspot.com/2010/09/rdwr_23.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue vs HV180&#8482 - pink).

I've highlighted the gap up - point being, this thing can move a lot and is in the midst of "waiting."

There is built up anticipation in the options in Oct; i.e. either this thing gaps up or gaps down, but $35 doesn't seem real stable for the long term. The Oct IV is over 82, while Nov IV is just 64. The Skew Tab snap illustrates this phenomenon perfectly (<a href="http://livevol.blogspot.com/2010/09/rdwr_23.html">in the article</a>).

<img src="http://1.bp.blogspot.com/_hMry1m7UF10/TJtlU54A54I/AAAAAAAAE8s/rXXlya259BA/s1600/rdwr_skew_9-23-2010.gif">

We see a fairly flat skew, actually surprisingly not upward bending. The shape of the skew is less of interest though, it's the absolute vol difference between Oct and Nov I'm eyeing.

<b>Possible Trades</b>
1) Sell the Oct 35 straddle @ $5.75 buy the Nov 35 straddle for $7.40. That's a net debit of $1.65.

The risk to this trade is that the stock moves far away from the 35 strike, essentially forcing the max loss of the full $1.65. A takeover or a confirmed "no-takeover" can easily move this stock price far from $35.

2) Sell the Oct 30/40 strangle @ $2.10, buy the Nov 35 straddle for $7.40. That's a net debit of $5.30.

If the stock moves exactly $5 away from the 35 strike in Oct, this becomes a big winner. If it moves far away from even the short strangle (<< $30 or >>$40), then it's max loss becomes just $0.30. A massive vol decline with the stock staying at $35 (like a confirmed takeover for $35) yields the max loss of $5.30, which is considerable.

These are actually quite risky trades, please note.

This is trade analysis, not a recommendation.

Details, trades, prices, vols, skews, charts:
http://livevol.blogspot.com/2010/09/rdwr_23.html

Legal Stuff:
<a href="http://www.livevolpro.com/help/disclaimer_legal.html">http://www.livevolpro.com/help/disclaimer_legal.html</a>
 
You can see the jump in OI in those calls below.

<img src="http://3.bp.blogspot.com/_hMry1m7UF10/TJtxV_NevmI/AAAAAAAAE9E/J0Q5NcxPH9A/s1600/rdwr_level2.gif">
 
Quote from livevol_ophir:

I have some trade analysis in this post, but just to stoke the flame of a possible cheater, check this out. On 8-19-2010 (nearly a month before the "rumor" announcement), someone tried to purchase thousands of the Mar 35 calls for $0.55 against an NBBO of $0.10 x $0.50. This is against a stock price of ~$23.00 and at the time, a 52 wk high of ~$24. I have included the trades from that day. The call buyer was only filled on ~1,500 calls. Note volume traded in one trade was larger than the entire daily average at the time.

As of today, those calls are worth ~$5.00, the OI is 1,750, so there you go. That's 10x the money in one month. Bottom line, I do feel like this was a cheater, but it's just one opinion of many.
More...

So, have you reported this possible violation to the SEC? Actually, you shouldn't have to as the SEC really should have people doing this kind of work. It seems like if they have enough legal authority (and I have no idea how much leway they are given), it would be a simple matter of reverse tracing who bought these calls, research the buyer (i.e. were they involved with the company), go interview the guy/people and have an open/shut case.

People getting away with things like this and we never see prosecution (at least that ends up wiping out the person with a long, long prison sentence) is one reason the SEC is so disliked? What are they working on most of the time?

I know you can probably point out an example here and there where arrests and prosecutions were made, but it's not good enough - every one of these should be stopped, period - it's really not that hard given the proper tools and authority.

JJacksET4
 
Quote from JJacksET4:

So, have you reported this possible violation to the SEC? Actually, you shouldn't have to as the SEC really should have people doing this kind of work. It seems like if they have enough legal authority (and I have no idea how much leway they are given), it would be a simple matter of reverse tracing who bought these calls, research the buyer (i.e. were they involved with the company), go interview the guy/people and have an open/shut case.

People getting away with things like this and we never see prosecution (at least that ends up wiping out the person with a long, long prison sentence) is one reason the SEC is so disliked? What are they working on most of the time?

I know you can probably point out an example here and there where arrests and prosecutions were made, but it's not good enough - every one of these should be stopped, period - it's really not that hard given the proper tools and authority.

JJacksET4
More...

agreed...
 
BTW, I didn't mean to sound like I was upset with you. Just this kind of stuff ticks a person off when it's my opinion it could easily be fixed.:mad:

JJacksET4
 
Quote from JJacksET4:

BTW, I didn't mean to sound like I was upset with you. Just this kind of stuff ticks a person off when it's my opinion it could easily be fixed.:mad:

JJacksET4
More...

I agree again. There was an article out on the SEC looking for a surveillance program on options and it was absolutely Mind Blowing how simple an application they were looking for... it implied how little they have now. It is a really broken machine from the little that I know. Almost unbelievably so.
 
Quote from JJacksET4:

BTW, I didn't mean to sound like I was upset with you. Just this kind of stuff ticks a person off when it's my opinion it could easily be fixed.:mad:

JJacksET4
More...

You didn't soud upset with me, you sounded upset with the failures of the regulatory bodies. Which is a healthy "upsetedness." :)
 
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