The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.
Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry is Not Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1
The goal with this scan is to identify back months that are cheaper than the front by at least eight volatility points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy volatility) and make sure I'm not selling elevated front month volatility simply because earnings are approaching.
Looking to the Skew Tab (below), we can see the elevated volatility in the front month (red line) relative to the second month (yellow line).In particular I'm interested in the volatility difference that has opened up in the 24 puts between February and March. Let's look to the Options Tab and make a trade. Trade: Sell to open February 24 puts at $0.55 and buy to open March 24 puts for $1.15.
The individual leg prices aren't the concern, it's the overall price of the spread. If you can't pay $0.60 or less, don't do this trade. The goal here is for TTM to wander down to around $24.00 by February expiration, or at the very least, to not go too much higher from here. On expiration (or anytime before), a close of this trade at $0.90 or more is a reasonable goal.
At the time of publication, Ophir Gottlieb held no positions in the stocks or issues mentioned.
Ophir Gottlieb worked as an equity option market maker and prop trader on the NYSE ARCA exchange floor since February 2008. He is now upstairs (off floor) and visits the floor a few times a week. Prior to working on the exchange floor, Ophir worked as a structurer on the Countrywide trading desk, and before that as the Director of Client Services and Research for the quant modeling firm Audit Integrity.
He has a master's degree in financial mathematics from Stanford University as well as an MBA in finance from the University of Southern California and an undergraduate degree in quantitative economics with a focus in mathematics from the University of California, San Diego.
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