TIVO, a Lesson in “Overpriced Volatility” Trading

Last week, we concluded a three-part webinar series on volatility.  Many trading books will describe situations when implied volatility is higher than historical vol as a time when volatility is considered overpriced. In our series, many listeners pointed out that they look to sell options when overpriced and they find under priced volatility when looking to buy.

Take a look at the vol chart from TiVo Inc. (TIVO) stock at the beginning of the day yesterday (March 4, 2010).

You could definitely look at this chart and argue that Implied is well over Historical and therefore a great sale.

You would have been wrong!

Yesterday, the stock rallied more than 60% after winning an estimated $300 million federal appeals court ruling in a patent-rights case versus Dish Network Corp. (DISH). The 60% one-day move in the stock price has caused historical volatility to jump more than 110 points while implied vol has fallen by almost 60 points, or 50%.  This morning’s vol chart looks dramatically different!

Even though the level of implied vol is lower today, sellers of “overpriced” volatility were absolutely carried out.

This is a great case study showing that situations with extremely high implieds versus historical are more likely a warning signal than a trading signal.

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