Today I was scanning for “exploding IV30’s’” in LiveVol Pro and came across APC, Anadarko Petroleum. Headlines said that they were being investigated in their involvement in the BP oil spill causing IV to increase. You can see the Skew chart below showing the Jun options inflated over the back months and a pretty steep horizontal skew as well. (Click any picture to enlarge).
You can see in the below chart of front and back month IV that the IV spiked and is now trending down for both front and back months.
With the underlying trading at $45.44 I bought a diagonal spread: +20 Jul $45 puts (65% IV) / –20 Jun $42.50 puts (79% IV).
Trade Logic: I’m taking advantage of both horizontal and vertical skew by buying back month lower IV and selling front month higher IV, and also selling lower strike puts with higher IV.
The Thinkorswim Analyze tab looks like this:
After my entry APC closed down a little today to give a small profit in the trade. Interestingly, you can see in the above picture that had the underlying not moved all from my entry at $45.44, the white line is above the breakeven line indicating that the volatility differential has closed a bit between back and front months allowing some profit (helped by just a tiny bit of theta).
Exit strategy: I’ll stop out on the upside if APC goes above $47ish. I’ll take small profits one spread at a time as either the underlying goes down or Theta / Vega work in my favor. Stay tuned
*note: No posts are trade recommendation and merely for education and entertainment.