Category: Double Diagonal

I mentioned earlier that I am looking for IV rise in BAC. IV for BAC had earlier risen to 30%, then quickly dropped to 20s which is still about 5% higher than mean.

However, due to $2billion funding to CFC, I am expecting a rise in IV, for short-term period. It may not happen and that’s why it’s a speculative trade vs an Income trade.

Ideally I was looking for a double diagonal but I couldn’t find one with good risk/reward hence opened a double calendar. It may or may not happen but here is a trade that i am placing for it. If IV doesn’t increase and BAC remains between 48 to 57, this trade will be profitable and maximum profit points are 50 and 55 that are expected to deliver over 50% gains in less than 4 wks time.

Sell 50 and 55 sept puts and buy Nov 50 and 55 puts for a total debit $1.00 per spread.

Profitable trading, OP

There is an interesting income trade opportunity amidst buyout news of Dow chemical (Dow).

• Sell: Dow 50 calls, 40 Puts, May
• Buy: Dow 55 calls, 35 puts, September
• Credit received:  $0.15 per trade
• ROM: Difficult to estimate, at current IVs, it is $76 (15.6%) to $117 (24%) (per trade) by May expiration for $485 investment without considering upsides from adjustments.

This is an interesting play as it takes advantage of heightened volatility on 50 calls (only). As per current combined IVs, the breakeven points are $39 and $51.7 (at May expiration). IV has risen and is around 30%, this trade can tolerate another 10% drop in IV should the news of takeover subsides. If however, IV goes higher, this is even better for this trade as this DD is vega play.

The apparent risk with this though is, what if it is bought for $50biliions as rumored (i.e. $52 to $58 per share)? Two sides of the story: The company has announced that it is in no takeover discussions and is not open for sale.(Note, The company has been in takeover rumors since Mid Feb for one or other name). However, there is huge open interest at $50 across all the months. This income trade may absorb shock upto $51.7 but nothing beyond. Other then VMC, I haven’t played stocks for DD, so I will dig deeper but thought to share this interesting opportunity for reader’s benefit. Check out Forbes for details: http://www.forbes.com/2007/04/10/dow-chemical-update2-markets-equity-cx_af_er_0410markets30.html?partner=yahootix Company will announce results on April 26^th before market though, and till then I guess IV will either rise or remain where it is now.  So here we are, to take or not to take this opportunity.