Hi Tuck,
Aviron is an interesting example. As you suggest, AVIR is a candidate for a straddle because there is an upcoming catalyst for a major move. Briefing.com confirms that there is a FDA Meeting on Aviron's "FluMist" and previous commentary indicates that this is a significant product.
The daily chart shows AVIR closing at 41 today on volume of 5,562,100, well above the 65-day average volume of 665,734. An AUG 40 straddle based on the last trades would cost 14.40.
Jon Najarian has suggested that straddles on earnings plays should be entered about 3 weeks before earnings come out. You could view this as a similar situation and say that the time for a straddle is past. At the beginning of the month, AVIR was trading at around 55. An AUG 55 straddle entered then looks like it would have been modestly profitable but liquidity was a lot worse then than it is now. Of course, if the stock pops up on good news then a straddle at 55 would kill you.
The problem that I have with a straddle here is the volatility. Take a look at a volatility chart on iVolatility.com. While the 30 day average of historical volatility is at around the middle of the range that it's been in for the past year, the implied volatility has gone through the roof since this month started. I would guess that the volatility is going to be a lot lower after the FDA meeting and that is going to drag down both put and call prices.
What about a calendar spread straddle (feel free to point out if there's a handy name for this)? Again based on the last trades, a calendar spread straddle would start at breakeven. I am not, repeat NOT, suggesting that anyone actually do this. I'm just trying to think through the factors in this trade. Implied volatility is much higher in the front month while the deltas are very close and this kind of volatility skew is exactly the kind of thing that calendar spreads are supposed to exploit.
If you hold on until around expiration (which generally looks necessary with calendar spreads) then one side will expire with a small profit. The other side should end with a better profit. OK, this is a lot less than the big gains you were anticipating but it seems a lot safer. With commissions (due to the four positions) and spreads (the spreads look bad and could get a lot worse when the volume drops down to average) though, this seems like a lot of work for an unexceptional return.
I guess the bottom line is that I just don't like a straddle here because of the volatility. You estimate a $15 down move for $12 profits or a $20 up move for $13 profits. How are you calculating those numbers? Based on the deltas I would expect a $15 move down to increase your puts by $6 and a $20 move up to increase your calls by $12 but these numbers don't reflect the loss that is likely to occur due to the decrease in volatility. I'm not saying that you're wrong, just that I'd like to have a better understanding of how you're making those estimates.
Good luck with this.
Mark |
