LXK vol crush and mean reversion (hopefully)

When I first entered into LXK (Lexmark), IV rank was pushing 90%. The stock hadn’t seen that kind of premium in a long time, mainly due to expected completion of a merger agreement that was approved by shareholders back in July. (Lexmark was acquired by a consortium of interests, including APEX Technology Co. and PAG Asia Capital.) The rookie mistake I made in planning the trade — I’m really showing my nether regions here — is that I didn’t include the share price that was agreed to. That share price was $40.50.

My plan was to sell a wide October strangle (expiring on the 22nd) at $38 (C) and $31 (P). I was filled at a very robust $2.20. I was happy with myself.

lxk-entry-20160928

The breakeven prices were $40.20 and $28.80. Note how Friday’s close was just a smidge below the breakeven price on call side…after being well above for most of the last two weeks.

lxk-payoff-20161028

Almost immediately after my limit orders triggered, volatility crashed about as low as it could. This helped keep unrealized losses low but did not help the overall outcome much. I’ll be monitoring closely in the final week, but there isn’t much that I can do. I missed my opportunity to roll the put side up last week (Oct 12). High probability that this stock will continue higher next week, but negative new flows and retracements in the indices may weigh.

Current chart with upside and downside breakeven prices:

lxk-chart-2016-10-16_10-01-39

Let’s see if I can’t get a $38 print. Limit order to close is in at $1.20 but I may let it ride to expiration.

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