Guest Post VolTradeBlog: Visa Inc.) Chart appears broken, it’s skew is inviting…

VolTraderBlog is the blog of one of my star students.  He asked if I would be interested in having him write a few guest posts.  I quickly said yes because anytime I can get an intelligent trader to write or speak for Option911, or OptionPit I will jump at the chance.   Why?

1. It is important to have outside contributors to add value to any trading enviornment

2.  There are many traders that can teach me a thing or two

3. It saves me work.

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I was reading Stock Twits a tweet got my attention about Visa…  Then I looked at the chart in Thinkorswim: (click any picture to enlarge)

Then I checked out the Live Vol (www.livevol.com) skew tab.  Note the major vertical and horizontal skew:

The trade:  Buy 10 Sep $80 puts (40.65% IV), sell 10 Jun $65 puts (57.75% IV) for a net debit of $9.16 per spread.  V was trading at $74.20.

Logic:

• Selling higher IV than buying.
• Sep expiry includes the 7/2010 earnings cycle.  This should help maintain the IV of the Sep puts or even inflate IV of my long Sep puts prior to the event. 
• I can also roll my short puts from Jun to Jul and then to Aug.
• Also, in theory if the underlying moves up, the Jun should lose IV faster than the Sep as the longs sell their inflated put protection. 

Exit Strategy:

Stopping out:

1. Tentatively, I’ll keep the $80 level in mind to stop out and accept that I was wrong.  At current IV that equates to around a $4,500 loss, however, this could be more or less depending on changes in the vertical skew. 

As for profit taking:

1. I will scale out depending on the price action.  If the underlying doesn’t move much and the skew lessens I’ll take small profits. 
2. If the underlying moves down, I’ll take off one contract at a time but will not feel any rush to do this with positive theta on my side.