Arcángel de Jesús Montoya
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Arcángel de Jesús Montoya in Money Trafficking,

Short Volatility In Yahoo's Weekly Options

Yahoo's (YHOO) stocks performed incredibly calmly yesterday after the earnings release:

(Source: Google Finance)

Nevertheless, the short-term (one-week) options are still overpriced, even though implied volatility should have decreased after the important information came out:

(Source: optionistics.com)

As you can see, there is a theoretical edge in this call option. On the other hand, the two-week calls are much less overpriced:

(Source: optionistics.com)

I therefore propose the following trade aimed at capitalizing on the difference in implied volatility between the above options:

(Source: optionsprofitcalculator.com)

The trade is also known as a calendar spread, which is a non-directional strategy (the directional risk is completely hedged). Here is the risk-return profile of this trade:

(Source: optionsprofitcalculator.com)

The "window of safety" with this trade amounts to around 7.5% of the current market price of the stock. I believe it is quite wide given the fact that the earnings date has passed and especially relative to historical data:

(Source: Google Finance. Calculations by author)

As a result, the risk-return ratio of 1.7:1 is very favorable given the low risk of significant movements in the price of the underlying (there are essentially no catalysts for volatility through the end of the week). I find it an incredibly interesting opportunity over a four-day period. What do you think?