TD Ameritrade (AMTD) – Trade Idea

Company Description

TD Ameritrade Holding Corporation is a provider of securities brokerage services and related technology-based financial services. The Company provides its services to retail investors, traders and independent registered investment advisors (RIAs). The Company provides its services through the Internet, a national branch network and relationships with RIAs. The Company’s products and services include common and preferred stock, exchange-traded funds, options, futures, foreign exchange, mutual funds, fixed income, new and secondary issue securities, margin lending, cash management services and annuities. The Company uses its platform to offer brokerage services to retail investors and investment advisors. In addition, it also offers various products and services to retail clients, such as touch-tone trading, trading over the Internet, real-time quotes, extended trading hours and direct access to market destinations. Source: Reuters

Charts

Option Pricing

  • Implied Volatility (expected price movement) for short-dated options is 56%
  • Realized Volatility (historic price movement) for short-dated options is 95%
  • Implied Volatility Percentile for short-dated options is 100%

Trade Idea

What happened?

Charles Schwab said on Tuesday that it is ending commissions for online trading in U.S. stocks, exchange-traded funds and options, the culmination of a years-long fee battle in the brokerage industry. Shares of Schwab fell nearly 8% on fears the change will hit margins. Rival brokerage firm TD Ameritrade plummeted more than 20%. E-Trade shares cratered more than 18%. Source: CNBC 

Our thinking:

With shares  ~20% lower and expected volatility in the 100th %-ile, current market conditions could prove to be an opportune moment to sell volatility. In our view further downside risk is limited. AMTD just lost over 20% of its market capitalization based on anticipation that the firm will have to follow suit and cut commissions to remain competitive with its peers.  Find below an example on how you could trade AMTD if you are bearishly disposed on volatility:

SideQtyExpStrikeType
Sell2x15 Nov35Put
Buy1x15 Nov30Put

Break-even on expiration:

  • Profits of up to $3.15 from $33.41 or higher
  • Theoretically unlimited losses with prices below $33.41

Note:

  • Margin is required to hold this position
  • Conservative traders may want to consider selling the 35/30 put spread (sell 35p, buy 30p) for more than 1/3rd the width of the spread

PnL Graph

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