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Two Straddles, One Stock

Two Straddles, One Stock

We are selling the October straddle and buying January on shares of BRCD.

We are selling the October straddle and buying January on shares of BRCD.

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

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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

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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).

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

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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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