CIT risk reversal

Thinking about taking a shot in the dark with CIT.

I'm looking at selling the Jan '10 $1 put for $.35 and buying the Jan'10 $2.5 call for $.35

I know the company is in some trouble and they aren't completely out of the woods as far as bankruptcy is concerned (debt was just downgraded even more) but if things turn around I want a piece of it.

Decided on this strategy since worse case scenario the company goes bankrupt and I lose $100 per contract, if I buy 100 shares of stock my max loss is $140. Plus I won't have to spend any money up front besides commissions. The problem is I'm going to need a 79% run by January to be in-the-money.

As far as volatility goes, implied volatility for the put im short is 193.7 and the call is 160.6. So my position would be short volatility and it'll stay that way unless the stock moves closer to $2.50. Right now implied volatility is high for the stock historically but its very low relative to historical volatility over the last month.

There's a lot to think about so I'm still debating it, is anybody else playing this stock at all?

Sux that there isn't a 2.5 Sept strike being traded, because i'd vote for a call calendar in this case. If a 2.5 Sept contract was available you could sell that call and buy the Jan10 2.5, you'd have 4 rolling opportunities to pay for the Jan10 2.5 and the rest would be gravy. You could sell the Sept 2 strike for the front month since there isn't a 2.5 contract, if you were a little more aggressive, just don't hesitate to roll it up and out to the Oct 2.5 if it starts to take off.

Actually I think I just talked myself into a trade, thanks for getting the gears turning, this could make a good hedge to my portfolio which is synthetically short the banking sector as a whole.

Edge, I think you talked me into it too lol. I like the calendar better here I didn't even think of it before, nice call.

Yeah, a 2.50 strike for september would be nice but I am liking october and january also. I won't have a chance to roll though since CIT doesn't have any expiration dates between October and January which is also pretty annoying.

But I was just going over some of the numbers and checking a P&L calculator. With the October/January 2.50 call calendar it seems like a pretty good deal.

If the stock is down 50% when the october options expire it's a .12 loss, if its up 50% by that time its a .38 gain. I'm using 50% because the volatility is so high on the stock right now.

Assuming 10% either way looks even better, its a .0036 gain to the downside and a .10 gain to the upside.

As far as implied volatility here's what I'm thinking. It shot up when the company started talking about bankruptcy and has stayed steady at those high levels. Apparently, bankruptcy is still a concern so I imagine volatility will stay pretty high. If all of a sudden there's a miracle and they have no bankruptcy worries, the volatility would probably come down which would hurt the trade but I'm sure the stock would jump in that situation.

I think I'll give it a shot.

I think options will trade in the front two months, so after September expiration they will create a November contract and then after October expiration, they will create a Dec contract. I'd be suprised if you didn't get 4 chances to roll this.

I agree, if IV gets crushed, the price should make up for it.

You are going to have to let me know how it goes, I talked myself out of it. I temporarily forgot one of my rules.....don't trade spreads on anything under $30. I've found that with cheap stocks, even if you are right, your broker makes as much money as you do because of the volume of contracts you have to trade. Also, i've found that it is difficult to get a good fill on rolling orders on cheap stocks, again because of quantity of contracts.

Ohh ok that makes sense.

I am transferring some cash into my account for the trade which they said will take 5 days so I'm buying it on the 25th as long as nothing changes too much. I'll check back later to tell how it turns out.