When the Time Spread Edge Can Look Too Good

When the Time Spread edge looks too good to be true....

 With the SPX closing flat today, I thought it would be interesting to identify other phenomena outside of the big indexes.  I did find the non-pull back today mildly bullish, and I think it has a hint of more upside to come (the Euro mess seems to be accepted now).  The ECB credit facility is providing the liquidity needed a la TARP, so they learned a lesson from the Fed in taking action.  The long term Euro budgetary solution remains to be seen, which will require, unfortnunately, more action. 

Outside of that, I want to highlight TIVO activity and what looked to be a nice time spread opportunity.  Note, in the chart below that the IV in TIVO was peeling away from the 30 day realized volatility.  They actually were going in opposite directions.  By late December, the January volatility had begun to spike over the February.  Sure enough there was a possible deal with ATT to settle some patent disputes over TIVO core technology (with a little licensing revenue tossed in).

Charts and data from Livevol(R) Pro (www.livevol.com)

TIVO gapped up around 9% today with the settlement news, which, overall, is probably good for the company.  What I am interested in, as an option trader, is what happen to those time spreads with the big volatility differential.  Note, in the chart on the bottom how the spreads collapsed, and the implied volatility dove down to the high 50% range.  The then ATM Time Spread (9 strike) would have been a small loser, and the just OTM (10 strike) call spread would break even.  An implied volatility collapse is expected after news is out (similar to earnings), but there was a window after the opening from the high 60% range, where selling the February straddle made sense as a day trade.  The trade would have clipped about .40 or so from the opening print.  There was a bit of time, as well, to see how things shook out.  Sometime selling premium is best done after the news is out. Less surprises that way.

Charts and data from Livevol(R) Pro (www.livevol.com)

If you want to see trades like this in real time and learn how to analyze market activity to turn them into actionable trades, try subscribing to Option Pit Live for a month to get the Real Time Pit Report and access to the Strategy Letter for building and managing different types of positions. 

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