Taking Advantage of High Options Prices with Huntsman Corp.

As a regular feature on the IVolatility.com home page, we list the Top 5 most expensive stock options relative the underlying stocks with the thought of finding options that we can sell to take advantage of the higher option prices.

From our Advanced Ranker scan here is the best of the Top 5:

Huntsman Corp. (HUN) 13.96 is in the number one place with an IV Index / HV ratio of 2.09. Salt Lake City based HUN manufactures and markets specialty chemical products worldwide such as polyurethanes and coatings. Last year, Hexion Specialty Chemicals and the hedge fund Apollo offered to buy HUN for 28. In June Hexion sued to terminate the merger claiming credit crunch issues. A court date has been set for September 8, 2008 so we can expect the implied volatility to remain high until a settlement is reached.

In the meanwhile, declining crude oil and natural gas prices along with recent product price increases should help their profitability.

The IVolatility.com volatility chart below from our Advanced Historical Data shows the positive volatility spread, or the positive relationship between the Implied Volatility and the Historical Volatility from an option seller’s perspective.

The current Historical Volatility of 50.30 is blue and the gold Implied Volatility Index of 104.65 clearly shows the positive volatility spread and is about twice the value as indicated by our Top 5 Advanced Ranker scan.

With a Call/Put ratio of 3.39 (three times more calls traded than puts) here are two specific cash covered put sale suggestions to consider, the first is out-of-the-money while the second is in-the-money.

• Sell HUN Sep 12 ½ put HUNUV 1.125 IV 100.40 Delta .3523
  • Sell HUN Sep 15 put HUNUC 2.625 IV 102 Delta .5900

Comparing the Implied Volatility of the these options, both of which are in excess of 100, to the Historical Volatility of the stock at 50.10, shows the positive volatility spread and the advantage, or edge, for the option sellers.

If there is a settlement with Hexion and Apollo, the Implied Volatility of the options will decline regardless of the settlement terms. In the unlikely event it is necessary for the dispute to be resolved by the courts, this matter could drag out for a long time and the Implied Volatilities will remain high.

Disclosure: none

Comments

[wagner2626:]

This is a bad trade. When the judge rules, or if there is a settlement, there is going to be a jump in price. By looking at vol and not at what you can make or lose, you fall into the trap that there is a non-continuous market. what if the judge rules Apollo can simply walk away and the stock then falls to 8. (I believe that 9 is the correct level given LTM EBITDA, but think that trading will push it lower as Arbs come out). The stock is currently at 13.6, so for your first idea one would have a gain on the short stock position of about 2pts (13.6 - 8 x 35 delta) and a loss on the option of 4.5 plus the premium of 1.1 for a net loss of 1.4 pts or 127% of the premium.

I think that there is way to many possiblities of a large discontinous gap to be selling options here. In effect, I believe that the prices are correct.

2008 Aug 25 11:12 AM