VSAR Calls Sky High

Sig said:
No, I'm sure it isn't. The OP was basically making a nonsensical observation and I was trying to point that out, but since he appears to not know what p/c parity is or have the curiosity to look it up, it was probably a wasted effort.
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Sig, the only thing that was "nonsensical" was your initial reply as it was just a jest at me (hence the reason for my follow-up). If your intentions were to teach me something you did a poor job at that and obviously you don't encourage posts.
 
jdib said:
Sig, the only thing that was "nonsensical" was your initial reply as it was just a jest at me (hence the reason for my follow-up). If your intentions were to teach me something you did a poor job at that and obviously you don't encourage posts.
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Sorry you're right. Definitely should have been less sarcastic and more helpful as I see looking back at my post.

If puts are priced with a significantly different implied volatility than calls, i.e. one is more "expensive" than the other, it represents a risk free arbitrage opportunity. You can do a combination of buying/selling short the underlying and buying/selling the put/call depending on where the pricing discrepancy is and realize a risk free profit. There are a bunch of algorithms looking for this phenomenon all the time, so it seldom persists for more than a couple microseconds. We call this put/call parity. If you do see it long enough to actually capture it, it's generally caused by a lack of availability of shares to short in order to carry out the arbitrage. So, if you think you see put's with a higher/lower implied volatility than the corresponding calls, it's worth a second look because it's most probably a bad quote feed, or if you've eliminated that an issue with short availability.
 
Sig,

Thanks for that. I understand that strategy but haven't done anything like that before. Believe it or not I make a living off of long term trading and only use options as a hedge or to back into positions. When I see something out of the ordinary even with an upcoming catalyst an alarm triggers for me.

The last time I posted here was in March. It was about the options of FOMX - at the time the stock was $9 and change and the $10 calls for the following month were being bought hand over fist for a huge premium (maybe it was $2.70 premium and liquid) in a stock who's options rarely trade. Most people here weren't sure what the play was. A week later the stock was cut in half with bad news and I assume the call buying was a hedge from a short who knew something.
 
jdib said:
Sig,

Thanks for that. I understand that strategy but haven't done anything like that before. Believe it or not I make a living off of long term trading and only use options as a hedge or to back into positions. When I see something out of the ordinary even with an upcoming catalyst an alarm triggers for me.

The last time I posted here was in March. It was about the options of FOMX - at the time the stock was $9 and change and the $10 calls for the following month were being bought hand over fist for a huge premium (maybe it was $2.70 premium and liquid) in a stock who's options rarely trade. Most people here weren't sure what the play was. A week later the stock was cut in half with bad news and I assume the call buying was a hedge from a short who knew something.
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Yeah I remember FOMX.... they had bad test results and went down 40% or something like that? I think the straddle was priced pretty good that time...

Same would go here... that VSAR straddle of 12 dollars, which was traded by trading the call and hedging short stock I assume, curious how that will play out.

I did have a quick look at the volume in the stock itself around the time the call traded and the first time there was some more volume... about the size of the delta hedge. Normally you would trade this size off-screen on a negotiated price through a broker, and a short stock will be attached as a hedge. Now, it could be that that volume I saw was the call buyer buying back the short stock... so going naked long...
 
And the winner is... not VSAR. Phase III results are poor - after hours trading shows the stock down 80%. Luckily I sold a call ratio so am ahead a few bucks but my oh my - these results are brutal.
 
Yea, I couldn't figure it out. Had that feeling it was going to tank and was right but didn't pull the trigger cause I rarely short or buy puts.
 
jdib said:
Yea, I couldn't figure it out. Had that feeling it was going to tank and was right but didn't pull the trigger cause I rarely short or buy puts.
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There's nothing to figure out really... it's a total gamble. Boom or bust. If the tests were successful it could've even gone to 40... The market projected a 12 dollar move... so 8 or 32. You just don't know which way the coin is going to fall unfortunately.

Puts were relatively cheap compared to calls, but that's because the upside potential is way bigger than downside... a very high implied vol will reflect this. For instance, the 30 call was about 2.80 and the 10 put about 1.50... so calls almost 2x the puts. Hindsight is that those puts were a good buy, but there's no way you would know. If it moved what was projected, you wouldn't even make that much on that 10 put. Same with the 30 call. Never underestimate the vol crush after the event...
 
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