Tuesday, January 23, 2007

PEIX & ENER Plays?

Who else wants to jump on the ethanol bandwagon in light of the Prez's state of the union address where he's expected to call for a sharp escalation in the federal mandate on use of ethanol as a renewable fuel alternative (click here for Yahoo Finance article)?

Since both Adam at Daily Options Report and J. Kahn at In The Money have talked about PEIX and ENER respectively I thought that I might add my plays on these two as well.

PEIX's IV has really shot up in anticipation of the expected address from the Prez which makes it difficult to play a directional bullish call play. So here's what I have in mind to play the bullish side of the equation while also anticipating a drop in IV after the address.

I'm looking at selling the FEB 20 Puts and buying the FEB 17.50 Puts for a net credit of $1.50. The 20's IV is at 67% and the 17.50 IV is at 66% which are way almost at 52 wk high levels.

Conversely, the Feb 17.50 Calls are currently priced at about $1.35 with a .60 delta and the 20 Calls are at .45 with a .27 delta. I post this info so that in the next few days we can compare the movements for measuring purposes.

The PEIX vertical spread play's reward to risk ratio looks acceptable with about a 1.5:1 ratio.

The ENER FEB 35/30's produce a less appealing r/r of .5/2 at a net credit of 1.70. The reason for the lower reward to risk profile is due to the larger spread between the strikes on ENER.

Doing some quick what if scenario in the pricing calc for the PEIX spread we get the following potential results:

If PEIX's stock rises $1.00 and IV drops 3 % after tonight's address the $1.50 credit turns into
1.20 (+20%)
If PEIX's stock drops $1.00 and IV stays the same the $1.50 credit turns into $1.80 (-20%)

The most one would lose in this play would be $1.00/contract.

Stay tuned for more on the PEIX spread play and grab a vine to share your thoughts/questions/concerns about the ethanol play.

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