Fading the news in a name is pretty hard to do. The opportunity is usually short lived. On several occasions for my posts it has worked out pretty well. For instance, I was giving a brief webinar for AlphaVision Beta testers yesterday and
popped as a name of interest (SMSC noted below had options that were too illiquid). I had the stock down around 8% with a pop in implied volatility as it showed up in
AlphaVision Landscape. Also, the name had implied volatilities trade well above its lows for the year, so that setup usually draws a put sale out me. Seems like everybody has decided all at once to downgrade SVU and that continues this morning, so I am holding off a bit. With earnings just around the corner, I find it curious (estimated date January) that there is a bit of a pile on right now. Either way I am going to hold back but that name looks like an excellent buy/write candidate because it so cheap on a value basis (5 P/E on a trailing basis) but has slightly perky option premiums. I am basically looking for a lower entry point.
SuperValu (SVU) Volatility
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On Monday, I had mentioned some energy stocks and they were go-go for most of that day. There was some fairly good churn in them yesterday and the most interesting to me was Anadarko Petroleum (APC) - Get Anadarko Petroleum Corporation Report. I had recommended a buy/write in this name near the height of the BP (BP) - Get BP Plc Report disaster and it was one of my better winners. Now with the stock nearly $30.00 higher, it is a bit pricy. The $90.00 takeover speculation has pushed APC near $78.00. This action has also dragged the implied volatility up in January since the rumor surfaced. Yesterday things cooled a bit and I saw February drift lower. In the Option Landscape below, I have the color set at a ratio of the mid-implied volatility (between bid/ask implied volatility) and the 30-day historical volatility. May implied volatility still looks in line (a little white), which I thought would get hit more if there was a bit of tooth to the rumors.
Anadarko Petroleum (APC) Volatility
The green color indicates the implied volatilities are trading at 30% premium to the 30-day historical volatility. I think this sets up for a small put butterfly centered around the 72.5 strike as some of the rumor cools and APC pulls back a bit. The fly keeps the speculative cost and risk of this trade down.
Trades: Buy to open 2 APC January 75 puts for $2.09, sell to open 4 APC January 72.5 puts at $1.16 and buy to open 2 APC Jan 70 puts $.67 for a $0.42 debit with APC trading $74.80, or better, on a -3 delta. The limit for this trade is $0.52.
Essentially we are betting on a slide back with this one and then some volatility compression at the 72.5 strike. This is Risk Level 1 trade for no net short contracts. You can only risk what you pay in the debit. Anything close to $72.50 and we close this right away.
At the time of publication, Andrew Giovinazzi held no positions in the stocks or issues mentioned.
Andrew is the Executive Vice President of Business Development for Aqumin, where he participated in the design team to apply AlphaVision to the financial markets. For 15 years he was a member of the Pacific Exchange and the Chicago Board Options Exchange, where he actively made markets and traded in both equity and index options. At the same time Andrew started and ran the Designated Primary Market Marker post for Group One, Ltd. on the floor of the CBOE where it became one of the highest grossing posts for the company in 1992 and 1993. While in Chicago and San Francisco, Andrew was instrumental in creating and managing a training program that allowed Group One, Ltd. to dramatically increase its trader count over an eight year period. He left Group One, Ltd. to co-found Henry Capital Management in 2001.
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