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Strategies & Market Trends : Option Spreads, Credit my Debit

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To: KFE who wrote (1880)	1/4/2001 12:06:59 PM
From: KFE	Read Replies (5) of 2317

Implied volatility trading. It might be worth discussing why I put on the last trade that I posted (HAND 30 Put calendar spread). The trade was a combination of implied volatility and a bearish directional play but it was the skew between the front month and subsequent month IV that attracted me to the trade. The stock was trading at 45 and the Jan30 puts were trading at 2 1/8 (some at 2 1/16,some at 2 1/4) and the Feb30 at 3 1/4. The IV of the Jan were 200 and the Feb 160. This amount of skew between the front month and subsequent month is highly unusual. Any time you can do a long calendar spread between front month and subsequent month options a few strikes OTM and pay a debit that is less than the premium on front month option you will have a very favorable risk/reward trade. To do the trade for a debit which is 50% of the front month premium is rare and will give an exceptional risk/reward ratio and profit range on the underlying. How did this skew happen? This stock is both the darling of the momentum crowd and short specialists right now. This is causing the IV of the cheapest put (lowest strike)to jump off the charts. I don't believe this situation will change before the Jan expiration when I will exit the trade. What are the risks? Two main risks: 1. The stock takes off on the upside. If IV remains the same I will be profitble to about 60 on the upside. A big move to the upside is possible because it is a momentum favorite but I am bearish on the stock and very willing to accept this small amount at risk if I am very wrong. 2. IV collapses. The IV is extremely high but I expect it to stay that way for at least the next couple of weeks, much speculation in this stock and the sector and this type of trader always attracted to the cheapest put (30 strike is the lowest available). If IV did collapse it would probably have a greater effect on profitability than an upward move in the underlying. I don't believe that I am at any risk on the downside for the stock because I cannot anticipate any downside move below 30 that would make the spread unprofitable. As with any long calendar spread the maximum profit point would be to close at the strike price on the short expiration. If this was to happen the trade would have a 500% return in less than a month. If this happened it would be pure luck and no skill on my part. The main point of these ramblings is that IV trading can offer a risk/reward ratio that is very attractive. I still use a manual scan to find IV trading possibilities and this is very tedious. Does anyone know of software where I can do a scan by entering my own parameters for IV on options. I must be able to enter my own parameters. Alternately,if I could find someplace where all options are listed in hard copy table form ( like they were years ago in the Journal) I think that I could pick up possibilities by scanning with my eyes. Regards, Ken

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