Extreme IV

wayneL · 6 December 2006

Trading Extreme IV

Check out the IV on this sucker The stock is Atherogenics Inc. (AGIX) trading currently @ ~$11.90

Of course it is due to pending FDA approvals (or not)

Playing the AtheroGenics Waiting Game

With a bit of greek ju-jitsu and timing we can make a low risk, high probabilty strategy with these.

***Posted for fun and interest.

Hopeful · 6 December 2006

How do you plan to take advantage of such high IV? High IV is a good time to do credit spreads, I heard. As this stock is about to explode then normally a straddle would work, but as the IV is so high it may not be a good idea. Can a straddle-like risk profile be created with a credit?

Or perhaps just buy a put! Simple. Why? Because the chart is screaming "short me".

Notice where the open interest is? The $5 Jan puts and the $20 & $25 Jan calls. So most punters are betting that it'll either double or half in price before Jan expirtion. Interesting.

I'd love to hear your thoughts on this in more detail. Thanks for the post.

wayneL · 6 December 2006

Hopeful said:
How do you plan to take advantage of such high IV? High IV is a good time to do credit spreads, I heard. As this stock is about to explode then normally a straddle would work, but as the IV is so high it may not be a good idea. Can a straddle-like risk profile be created with a credit?

The way to exploit this is to be net short premium, while covering as much risk as possible.

A long straddle, unless the move is truly gargantuan, would be a certain loser after the news is released. Gamma is so small at these IVs that a big move and exit BEFORE the release of news is required. The only hope would be an increase of IV, which seems improbable at this point.

A straddle like risk profile at a credit? Yes possible, but gamma would be VERY flat and you would need either little movement or a helluva lot.

Any strategy with long vega stands to be crushed when the FDA news is released unless it moves 70-100% or more.

Hopeful said:
Or perhaps just buy a put! Simple. Why? Because the chart is screaming "short me".

Watch out for vega risk

Hopeful said:
Notice where the open interest is? The $5 Jan puts and the $20 & $25 Jan calls. So most punters are betting that it'll either double or half in price before Jan expirtion. Interesting.

Open interest doesn't tell you anything by itself. You don't know whether that OI is punters buying or selling... or spreading. If they are buyers, then that's exactly what they are, punters.

Also IV is telling us that the FDA announcement is expected AFTER Jan expiry... bads news for those OTM long options (if they are long)

Opportunity here, but danger too!

ducati916 · 7 December 2006

et al

With a bit of greek ju-jitsu and timing we can make a low risk, high probabilty strategy with these.

The title of the thread should suggest a strategy.
If the IV is extreme, then as traders you should be looking to fade the volatility on the basis of reversion to the mean.

Based on the information, viz. an FDA announcement, after the news is disseminated, we could expect volatility to decrease back to circa historic levels.

jog on
d998

nelly · 7 December 2006

ducati916 said:
et al

The title of the thread should suggest a strategy.
If the IV is extreme, then as traders you should be looking to fade the volatility on the basis of reversion to the mean.

Based on the information, viz. an FDA announcement, after the news is disseminated, we could expect volatility to decrease back to circa historic levels.

jog on
d998

I know you don't care..... but.... you's lost me at "The"....what the heck does IV mean...................hey!...... i'm trying O.K.......................... Whether you like it or not you are teachers here.........[to the people who think they are smart enuf to save the dollars on the books who teach them NOTHING]
Always cheerful

wayneL · 7 December 2006

ducati916 said:
et al

The title of the thread should suggest a strategy.
If the IV is extreme, then as traders you should be looking to fade the volatility on the basis of reversion to the mean.

Based on the information, viz. an FDA announcement, after the news is disseminated, we could expect volatility to decrease back to circa historic levels.

jog on
d998

Yes!

Couldn't think of a better name for the thread, any suggestions?

Meanwhile here is the IV mean/SV chart:

ducati916 · 7 December 2006

nelly said:
I know you don't care..... but.... you's lost me at "The"....what the heck does IV mean...................hey!...... i'm trying O.K.......................... Whether you like it or not you are teachers here.........[to the people who think they are smart enuf to save the dollars on the books who teach them NOTHING]
Always cheerful

Nelly,
IV = Implied Volatility, or future volatility.
Of all the greeks, this is the one you cannot really number crunch, hence the reason enzo is utilizing the visual [chart] representation.

Markets trend;
Up, down, sideways.
Whatever the direction, they never move only in that direction, they tend to trend based on equilibrium, which simply means really big moves come back to the middle ground, before, continuing up, down sideways.

Therefore, if you have a really gargantuan move in one direction, they will revert to some form of equilibrium in a period of TIME.

In options, theta measures time decay.
Thus, if we expect a reversion, and are placing money on a reversion, we are saying that two components could be important; price [delta] & time [theta]

If a further upward move is determinisically a lower probability, then, we have a more cut & dried choice, and we must construct a strategy around delta & theta, assuming vega will decrease.

jog on
d998

Hopeful · 19 December 2006

Hopeful said:
Or perhaps just buy a put! Simple. Why? Because the chart is screaming "short me"

Well, I sure got that one right! Down to $10.60 already. One could have made buckets of money on it.

Wayne, what did you end up doing?

Hopeful · 22 April 2007

Hopeful said:
Well, I sure got that one right! Down to $10.60 already. One could have made buckets of money on it.

Wayne, what did you end up doing?

Now it's at $3.65 . My brilliant analysis of the chart turned out to be awesomely correct. This is how much moola I made from trading it: minus .

wayneL · 23 April 2007

Hopeful said:
Now it's at $3.65 . My brilliant analysis of the chart turned out to be awesomely correct. This is how much moola I made from trading it: minus .

I made as much as you I didn't trade it either, couldn't get rid of enough risk.

Extreme IV

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