When the Time Spread Edge Looks Too Good to Be True
When the Time Spread Edge Looks Too Good to Be True
With the SPX closing flat yesterday, I thought it would be interesting to identify other phenomena outside of the big indexes. I did find the non-pull back today mildly bullish, and I think it has a hint of more upside to come (the Euro mess seems to be accepted now). The ECB credit facility is providing the liquidity needed a la TARP, so they learned a lesson from the Fed in taking action. The long term Euro budgetary solution remains to be seen, which will require, unfortnunately, more action.
Outside of that, I want to highlight TIVO activity and what looked to be a nice time spread opportunity. Note, in the chart below that the IV in TIVO was peeling away from the 30 day realized volatility. They actually were going in opposite directions. By late December, the January volatility had begun to spike over the February. Sure enough there was a possible deal with ATT to settle some patent disputes over TIVO core technology (with a little licensing revenue tossed in).
TIVO gapped up around 9% yesterday with the settlement news, which, overall, is probably good for the company. What I am interested in, as an option trader, is what happen to those time spreads with the big volatility differential. Note, in the chart on the bottom how the spreads collapsed, and the implied volatility dove down to the high 50% range. The then ATM Time Spread (9 strike) would have been a small loser, and the just OTM (10 strike) call spread would break even. An implied volatility collapse is expected after news is out (similar to earnings), but there was a window after the opening from the high 60% range, where selling the February straddle made sense as a day trade. The trade would have clipped about .40 or so from the opening print. There was a bit of time, as well, to see how things shook out. Sometime selling premium is best done after the news is out. Less surprises that way.
Charts and data from Livevol(R) Pro (http://www.livevol.com/)
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About Mark Sebastian
Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University.
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