IMCL PCCRC, making money with VEGA - Part II

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How to view the entire chart:


1. Try clicking on the name of the most recent article in the column on the right. This will remove the "Archives" list.
2. Try right click on the chart itself and open it on a separate window.


I am sorry that I cannot always make the chart small enough to fit neatly on the left column. I want you to be able to see the details I want to point out.


I Hope this helps,


Juan

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I have received this trade from our friend Rick.


For those with Platinum, here is the URL
http://tinyurl.com/hp767
His comment was posted below the first article in this series:
http://stockoftheday.blogspot.com/2006/05/another-imcl-pccrc.html
Here is the text:
Here is an IMCL trade I place on 060606. [...] Set the chart Stock Price Limits to 25 50 and see the excellent picture. Please give me feedback as to whether this is a good trade. Rick

I have a PCCRC on IMCL on my own. Here it is:


For those with Platinum, here is the URL
http://tinyurl.com/qa4ly

To be able to comment on Rick's trade and compare with my own, it is important to look the IMCL I.V. for the last few months. Pay close attention to the I.V. for the different expirations:


Notice that the IV for the long-term options is low. Rick is long JAN07 options while my longs are NOV06 options. In both cases, IV is around 37%. In the case of IMCL, IV has not been this low in recent months, and it is likely to raise. NOV06 and JAN07 are likely to rise but the closer to expiration you are the more violent the movement could be. We are hoping for the volatility of the long term options to increase because that would increase their value. However, most investors don't look at back months unless there is a reason for it. That is why you have skews some times. In fact, you can use Platinum Skew II to locate candidates.

Rick seems to have low interest in the DELTA movement of the stocks and he is hoping to make VEGA or THETA gains. This is why he uses a STRANGLE in his long position, hoping to erode the value of the shorts by consuming THETA and VEGA simultaneously, while keeping the cost of the JAN07 options low. Should the stock JUMP above 40, I would collect DELTA gains, while Rick will hope that the stock price does not go UP in low volatility, unless the stock does go up, way up. This is because I entered an ATM Straddle, so it is more succestible to DELTA GAINS.

My short options are only 10 days away from expiration, while Rick's have more than a month to go still. Rick is concerned about the configuration of his trade. The "bubble" formed in his trade, he views as a signal that a volatility crush is about to happen. I had a moderate bubble when I entered my trade, but that seems to have diminished now. This is because despite the Vega value of those options, Theta seem to be eroding it effectively. The IV of my shorts are high right now, and one has to pressume that either the volatility of the short-term options will decrease, or the volatility of the long-term options will increase, or both. In any of these cases, the value of both trades should increase.

I have seen how earnings tends to have a depleting effect on I.V. of both long and short-term options. One must keep in mind that the first few days after earnings, there is a deflation in the volatility of all options, most of the time. BUT, in my experience, this effect, eventually dissapears. The uninitiated, may panic and thinking that they are in a losing trade, the close the position at a loss.

It is best to stay with it, unless you have a good profit. For whatever reason, be it VEGA or DELTA or even THETA gains, if you have a $3000 in a $16K trade, you should consider exiting the trade and look for a better candidate. Vega gains have a way to desappear on you unexpectedly. Be sure to undertand where the news may come from that would deflate volatility, and then act quickly, unless you are willing to wait weeks for volatility to pick up again.

Rick has decided to go to JAN07 because volatility was lower than that of the NOV06 options. I prefer to keep the options 4 or 5 months away, so NOV06 was already a stretch. This is because I want to play DELTA more than THETA and VEGA. This is probably why I already show a small profit and why Rick has the bubble.

We will continue to observe this trades. What would happen with them, I don't know for sure. This is a reactive trade. If there is a good move or increase in IV, then you take profits, leave or modify the trade....

WE WILL SEE. Rick, hang in there!