Two Straddles, One Stock
Brocade Communications (BRCD) is trading at $5.69, with 30-day implied volatility of 51.51 as of ~ 9:48 a.m. EDT. The Livevol Pro Summary is included below.
Brocade Communications (BRCD) Summary
Source: Livevol
I found this stock using a custom scan I built searching for good time spreads. The Custom Scan image is included below:
Time Spread Scan
Source: Livevol
Time Spread Scan Details:
Stock Price GTE $5
Avg. Option Volume GTE 1500
Industry is Not Bio-Tech
Sigma2 - Sigma3 GTE 7
Sigma2 GTE 1
Sigma3 GTE 1
Days After Earnings LTE 10 GTE 70
The Sigma2,3 GTE 1 is just a sanity check so I do not get any weird bond funds with 0.5 vol or whatever. The days after earnings make it so I can eliminate some earnings volatilities from the front month, as I am looking for natural time spreads, not earnings plays (I have a separate scan for earnings).
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BRCD came up, and I find it an interesting time spread candidate. The Livevol Pro Options Tab is included below (tied to the $5.69 stock).
Brocade Communications (BRCD) Pricing
Source: Livevol
We can see the BRCD January 6 straddle is priced at about $1.18 or 42 volatility, while the BRCD October 6 straddle is priced at about $0.70 or 49 volatility. I like this volatility difference and want to trade it. Note, BRCD January options have the benefit of earnings (a volatility event).
Trades: Sell to open BRCD October 6 calls at $0.20, sell to open BRCD October 6 puts at $0.49, buy to open BRCD January 6 calls for $0.45 and buy to open BRCD January 6 puts for $0.75.
The net debit is $0.51.
This trade wins to time decay and volatility increases (back month gives us long vega). It loses if the stock moves substantially away from the straddle or to a volatility collapse. A takeover would be a loser to this trade.
At the time of publication, Ophir Gottlieb held no positions in the stocks or issues mentioned.
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