Friday, January 29, 2010

Rolling the dice on XOM

Another name that reports on Monday 2/1/10 is XOM. Does not look like the market is expecting much. But I decided to buy 20 Feb '10 $70 call contracts for .11. I am risking $220 dollars. Take a look at the price slices below. In the first screen shot I left vol alone and then I adjusted it down by 5%. Historical vol is currently at about 14% and this option is trading with a vol of 19% so an adjustment of 5% would put it in line with historical.

The options market is only pricing in about a 3.8% move based on the front month straddle. This gives XOM an expected range of 62.75-67.70. Like I said this is just a gamble, but if it hits I could win the option lottery so to speak. Every once in a while I like to take these small bets just for fun. Have to fullfill that gambler inside.

5 comments:

  1. So on this trade you're expecting historical vol to catch up with current vol? instead of the current vol falling after earnings to match historical?

    I understand the need to fill the gambler itch, that's pretty much what my SPY put purchase was today. It's only a risk of $250. It does feel a bit odd to purchase pure time value when I've made so much over the years by selling time premium and watching it expire.

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  2. No. Historical Vol is at 14% and the IV is at 27% (I accidently put the 19% IV of the contracts that I bought, but this would put IV on the contract to match HV), so I adjusted the model with a 5% decreas in IV to move down closer to HV to see the difference in price slices. The reason I only chose to go down 5% which would leave IV at 22% is because over the last year 22% is the 52 week low of IV.

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  3. The other thing that I noticed on the chart is that the past four earnings releases had been at the top of rallies and then a sizable sale off after earnings occured. This time there has been a huge sell off from a high of $77 down do around $65.

    Not sure that means anything, but maybe it will have the inverse realtionship...

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  4. XOM did beat and the stock is up. But not enough to yield a profit. I thought about keeping the trade on, but because the catalyst that I was looking for to propel the stock higher did not I cut the position for a break even trade less commissions. No reason to just through money away.

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  5. So what happened on this trade? Did the stock move up but not enough to offset for a decrease in IV?

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