Volatility Strategy

[positivecashflow]

Here is CVTX exhibiting a huge volatility skew. You want to play non-directional but you also want to be careful of IV crush. Which trade would be the best for this situation? CVTX currently trading around 20.72.

 

[SuperTed]

Ok this is how I trade and would trade this.

Firstly i would want to know WHY the volatility is up. The reason could keep me out, but if its like most BS in the market I would be in.

I would then write naked puts on a intraday or daily dip in share price (to get better prem) at level below that red line, since i would get good premium (based on high volatility) for being far enough away from the fire.

I would also write 8-12 weeks out to give me time (in case of short term correction/ my stuff up).

Iwould definatley NOT write atm or close to money since the high volatility means I dont have to take that risk. And Hopefully find a series that is way over priced.

Is this the best trade that you ask? I have NFI but for me it would be ;-)

If i wanted to be a nancy boy i could do a bear put spread (below the red line of course)

 

[money tree]

buy straddle 3-6 months out. write straddle 1 month out. sell 3-6 month straddle upon 1 month expiry. should be close to risk free.

 

[DTM]

Looks like the price is going to move, either up or down. I think that it is more likely to go down and would just buy puts.

 

[money tree]

dissagree DTM

it has had a volatile move. a period of LOW volatility always follows a period of high volatility. secondly, the chart is putting in lower highs and higher lows, indicating a range bound consolidation. thirdly, buying puts when IV is so high means you will not make money even if the stock falls.

 

[DTM]

dissagree DTM

it has had a volatile move. a period of LOW volatility always follows a period of high volatility. secondly, the chart is putting in lower highs and higher lows, indicating a range bound consolidation. thirdly, buying puts when IV is so high means you will not make money even if the stock falls.

Hi Crashy

The April 22.50 put spread is 2.70 to 2.90, so its mostly intrinsic value. The calls are more expensive so maybe market's pricing it to go up. I'm still bearish on the NASDAQ so would be leaning towards being bearish. Either way, ir will be interesting to see where it goes.

 

[positivecashflow]

Quote from article I read:

Call options on CV Therapeutics were busy Monday [last week], even as the stock slipped 25 cents to $20.63 a share. The heavy call activity involved short-term contracts and appears to be speculative activity in anticipation of a move higher in the stock price. The reason for the increasing volume is not quite clear yet, but a large volatility skew in CVTX options indicates that some option traders are bracing for a volatile move in this stock going forward.

 

[positivecashflow]

Here was a risk graph I was playing with.. didn't get filled though for the debit of $1.40... Breakevens were at 15.30 and 40.95..

 

[positivecashflow]

buy straddle 3-6 months out. write straddle 1 month out. sell 3-6 month straddle upon 1 month expiry. should be close to risk free.

Hi Crashy,

Are you writing more contracts than you are buying? Also note that the IVs for 60-90 and >90 day options are much higher than the 7-30 and 30-60 day options and therefore you are buying high IV options (in your 3-6 month straddle) and selling low(er) IV options (in your 1 month written straddle).. Please correct my assumptions!

 

[DTM]

Hi Crashy

The April 22.50 put spread is 2.70 to 2.90, so its mostly intrinsic value. The calls are more expensive so maybe market's pricing it to go up. I'm still bearish on the NASDAQ so would be leaning towards being bearish. Either way, ir will be interesting to see where it goes.

April 22.50 puts finished with 25% increase in price/profit. It had reached over 40% profit level in today's trading.

I'm still bearish on the NASDAQ and CVTX.

 

[money tree]

DTM

you have been right, for the first day at least. However PC asked for a non directional strategy. Also, he provided very limited info. My comments were based on the question asked about the info provided, which is only ATM I.Vs. Getting into theories about ITM options for directional trades is a different issue.

PC

I wasnt paying attention. The strategy should be to buy the longer dated lower IV straddle and write the shorter dated higher I.V straddle. I really dont understand why shortest dated doesnt have highest I.V. Normally the case.

"Breakevens were at 15.30 and 40.95"

curious terminology there. sounds like something out of a course....

next time perhaps show us the option strikes and values like wayneL did?

 

[positivecashflow]

Crashy,

curious terminology there. sounds like something out of a course....

Your point being?

next time perhaps show us the option strikes and values like wayneL did?

Would have thought it was easy to bring up an option chain for a particular stock... (www.cboe.com). But I will post the whole chain later today.

I really dont understand why shortest dated doesnt have highest I.V.

I think they are expecting a big move in the future rather than in the next month or so.

 

[positivecashflow]

Sorry for the delay in the option chains... Here you go for those interested.

 

[DTM]

Here is CVTX exhibiting a huge volatility skew. You want to play non-directional but you also want to be careful of IV crush. Which trade would be the best for this situation? CVTX currently trading around 20.72.

PC, What did you do?

 

[positivecashflow]

Trade wasn't filled so I moved on... Jan06 / May 05 20 Put Calendar Spread for debit of $1.40...

 

[wayneL]

I've never played these calendar spreads, but been having a good look at these.

My concern is still volatility crush....great for the short dated sold option, but there is still a hell of a lot of time value on the long dated bought option at relatively high iv's.

If iv's start declining on the long dated option, within the timeframe of the trade, it changes the payoff diagram at expiry of the short dated option detrimentally.

Does this make sense? Is it a valid concern?

Cheers

 

[wayneL]

Interesting what you can to with a low iv, low skew, horizontal spread.

Using a ratio, plus some delta hedging, one can create a theoretically risk free strategy.

These are a lot easier to find than big iv skews and have less in the way of nasty surprises like volatilty crush.

Cheers

 

[positivecashflow]

I've never played these calendar spreads, but been having a good look at these.

My concern is still volatility crush....great for the short dated sold option, but there is still a hell of a lot of time value on the long dated bought option at relatively high iv's.

If iv's start declining on the long dated option, within the timeframe of the trade, it changes the payoff diagram at expiry of the short dated option detrimentally.

Does this make sense? Is it a valid concern?

Cheers

Yes Wayne you are absolutely correct! Placing a calendar with high IV in the back month is definately not a trade worth getting into.. luckily I did not get filled but did track this one on paper. Better stick to placing low IV calendars with emphasis on low back month IV. I'll leave these huge volatility skews (where the stock hasn't moved yet) for strangles and straddles.

 

[positivecashflow]

Interesting what you can to with a low iv, low skew, horizontal spread.

Using a ratio, plus some delta hedging, one can create a theoretically risk free strategy.

These are a lot easier to find than big iv skews and have less in the way of nasty surprises like volatilty crush.

Cheers

Hi WayneL,

Can you expand on this further? Maybe give an example on XYZ stock?

 

[wayneL]

Hey Pos,

Suppose were using puts:

Buy a few more of the back month puts at a ratio of about 1.2:1 - 1.5:1

Then delta hedge with either some bought calls or long stock... ratio of around 0.1:1 - 0.3:1.

Some fiddling with expiry dates and ratios is required to make it risk free.

Example of payoff diagram at expiry of front month ↓