I posted a couple times that I’m trying to embrace volatility analytics more in my opening trades. It’s an area I’ve been aware of, but not fully embraced. Last week’s AMZN trade worked out ok, but in hindsight, I bought higher volatility than I should have on the long leg, and when AMZN had a lull (with dropping vol), it really started to hurt me.
I wanted back into AMZN today, but here’s what I looked at before designing a trade:
1. The IV right now on AMZN is at the 12th percentile for the year, very low
2. The HV right now on AMZN is at the 1st percetile for the year. Uber low
3. The IV/HV ratio is 189% though, meaning that IV is almost double HV(20).
This is the trouble I got into last week, buying when IV was very elevated over HV.

So instead of a diagonal, I’ve decided to do a July 13 Butterfly. I used the square root calculation to define my own expected move for July 13: $92.00 (Square root of DTE/365 * IV * Stock price). That gives me a 1630/1720/1810 fly. But I didn’t like the T+1 line slope on the right side, so I broke the wing to flatten the line.
Bought to open: Jul 13 1630/1720/1800 AMZN call fly @ 36.22 1x2x1. It’s got a 49% probability of profit, max profit is $5350, max loss $3622. I usually target about a 15% profit on these. This is delta neutral at almost zero. Very small negative gamma, 34.60 a day in theta, -123 Vega to play for a vol contraction back to HV.

This will be a smart trade if IV drops back towards HV. BUT HV being at 52 week lows means that IV could be leading HV higher. Either way, it will be a fun experiment….stay tuned.

Muddy Waters is Short TAL Education Group (NYSE: TAL US)

Muddy Waters is short TAL Education Group. Investors might recall the dark days of 2010 and 2011, during which numerous U.S.-listed China companies went down as frauds. According to the recent documentary, the China Hustle, there were approximately 400 frauds from China listed on U.S. exchanges. Out of literally hundreds of blatant frauds, almost no company chairman did any prison time. Charlie Munger is fond of saying “Show me the incentive, and I’ll show you the outcome”. Defrauding U.S. investors from China has proven to be a “heads I win, tails you lose” proposition. So, it does not shock us when we see that TAL began fraudulently creating profits as early as FY2016. Since the beginning of FY2016, the value of Chairman Zhang’s shares have skyrocketed from $900 million to close to $7.5 billion. The prospect of becoming Bobby Axelrod rich is a powerful incentive, especially when you have no downside if caught.