Blog: October 2010

Friday, October 29, 2010

Alcoa (AA) - Skew Bends and Bullish Trades

AA is trading $13.08, up 3.4% with IV30™ up 11.8%. The LIVEVOL™ Pro Summary is below.

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I found AA on a new custom scan I built searching for IV30™ moves:

Custom Scan Details
Stock Price >= 5
IV30™ Percent Change >= 10%
IV30™ >= 10
Average Option Volume >= 1,200
Days After Earnings >= 10 and <= 70
Industry != Bio-tech

The company has traded over 93,000 options on total daily average option volume of just 41,704. Calls have traded on a 5:1 ratio to puts, net premium and net deltas are long - there are calls buyers out there it seems. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action in the Nov 13 and 14 calls, though the OI is larger than the trade volume. Note that Nov vol is up 5 points while Dec is up just 2.7.

The Skew Tab snap (below) illustrates the vols by strike by month.

This is where I think a trade opportunity may exist. The upside is super bid in Nov, with the ATM calls priced at 36 vol and the 14 calls priced at 39 vol (normally vol goes down as strike increases).

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock made a nice move up off of earnings earlier this month and today it's found a little pop. On the vol chart (bottom portion) we can see the IV30™ has just now popped past the HV20™ and HV180™, though it's still well below the "earnings vol" level.

Possible Trades to Analyze
1. If you like the news coming out of AA and in general for the industry, this could be a nice time to do a plain vanilla Nov 13/14 call spread and pay ~$0.31 for more than a 2:1 MaxGain:MaxLoss with $0.08 of parity already built in. It's a small bet that gets you long deltas and sells higher vol than it purchases.

2. A bit more involved, do #1 and sell the 2 of the Nov 14 calls... That makes a net debit of just ~$0.15, but does leave naked upside in a rallying stock with vol increasing and skew bent up. Lol... How was that for two sided analysis?

3. Also, for the very bullish, a 13/14 c/s with a 12 strike put sale is more bullish but pays less premium.

4. If looking to do a calendar, the Nov 15/Dec 15 c/s (buy Dec) purchases 38 vol and sells 45. This is a skew trade, looking to sell that divergence. It's ~ $0.09 bet and is probably my favorite of the bunch, but I am allergic to long deltas so don't mind me... This trade may be easy to get out of on the week of Nov. expo and just shut it down, depending on stock price.

This is trade analysis, not a recommendation.

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EnCana (ECA) - Vol Explodes Again on Rumors

ECA is trading $28.10, up 1.7% with IV30™ up 19.7%. The LIVEVOL™ Pro Summary is below.

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I wrote about ECA on 9-30-2010: ECA (EnCana) - Vol Explodes, Front Month Calls in Play

The title could have been the same today. The stock was trading $29.78 at the time with IV30™ up to 41.27 which was a 40% jump that day. Eddy Altamirano drew my attention to this one today.

Today the company has traded 16,437 options on total daily average option volume of just 6,036. Again, the action is in the calls, with a nearly 9:1 ratio to puts. The front month calls have traded over 10,000x. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Nov 29 and 30 calls are mostly opening (compare OI to trade size). Note that Nov vol is up 8.1 points while Dec is up 3.2.

The Skew Tab snap (below) illustrates the vols by strike by month.

Crazy upside bend in the front month. I have also included the Skew Tab snap from the 9-30-2010 post (below). Basically the same chart, right?

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

After the last takeover rumor bonanza in this stock (highlighted in chart), the price peaked to $30 (ish) and IV30™ exploded to nearly 43. But since, the stock dropped to the $27 range and IV30™ fell to under 29. And, today... Again... Stock up, IV30™, really up. Will history repeat itself, or will something actually happen this time?....

This is trade analysis, not a recommendation.

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Avanir Pharma (AVNR) - Analyzing a PDUFA Date & Trades

AVNR closed at $2.81, up small with IV30™ now nearly 400% coming into the PDUFA date. The LIVEVOL™ Pro Summary is below.

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Jeff Kearns and Rob Waters at Bloomberg authored a nice article on this bio-tech a couple of days ago. You can read that post here:
Avanir Short-Sale Bets Rise to Record Before Oct. 30 FDA Ruling on Drug

Yesterday the company traded over 41,000 options on total daily average option volume of just 5,572. The net premium is quite large, indicating that people are buying options even with vol at this level. Note that calls traded 3:1 to puts. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action in Nov. The Nov 1 puts traded 3,000+ times, and this morning OI is nearly 8,000 so they were opening. The Nov 3 calls traded 10,000+ x. The OI this morning is nearly 20,000, so those two were opening.

The Skew Tab snap (below) illustrates the vols by strike by month.

Other than the very high vols, the shape is pretty normal. Note that the front month (red) is much higher than the back, indicating that the options market believes that it's a virtual certainty that the "news" will be out this cycle.

What Does the Option Market Imply
The Nov 1 puts closed $0.15 x $0.20, so give it a fair value of $0.175. On the floor we call these the "bankruptcy puts." In other words, if those go in the money, the company is virtually (or literally) done. Very rough back of the envelope trader speak says that we see a ~20% chance this thing goes belly up on the news.

We can also see that the Nov 6 calls have the same market $0.15 x $0.20. Again, roughly speaking, that means the options market indicates an equal likely hood of bankruptcy as the stock moving up ~115% (or more). Jeff's article does a great job of summarizing how the experts feel. I believe it reads that they are ~75% sure this thing gets approved.

If that's the case, then an extremely rough "guess" of where the stock could go on approval would be $6/0.75 = $8... Whoa... $8....

Generally in bio-techs one rule of thumb is that the meat (ATM) is too cheap and the wings are too expensive. Conveniently there are Nov 0.5 puts to use.

If you want to gamble (and that's what this is, a gamble), you can find some premium to play with by selling the Nov 0.5/1 put spread @ $0.10 (or better b/c there is liquidity in the 1 line). That max loss is just $0.40 and hypothetically there is ~ 20% chance that gets realized. Selling the spread @ $0.15 yields a max loss of just $0.35.

You can use that $0.15 of premium, sell some OTM call, and then use that to buy an option. Of course, this assumes you want to gamble on good news. A gamble on "not-good news" is pretty easy. You could just pay $0.05 in the Nov 0.5 puts, or go ahead and do the Nov 1 puts.

Another few things to look at. If you also want to bet that the news is surely in Nov, you could look to sell the 1 puts in Dec. Maybe those get done @ 0.25?...

Anyway, if you play this please be careful if you're naked short or long options. Make sure you apply some sort of probability analysis (even if it's your own) and then make sure your payout looks BETTER than the odds you have conceived.

Ultimately, when the market and vol get wild in a bio-tech, you can find trading gems, like butterflies for even... Hmm... Where would that be?

This is trade analysis, not a recommendation.

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Thursday, October 28, 2010

MCP - China Owns Rare Earth and Won't Share it? Stock Drops, Vol Pops

For those that don't know, here's a quick overview of the "Rare Earth" story, with links to more details.

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From Fortune (full article Click Here):

Rare earth minerals... are materials produced largely in China (buzzword No. 1) for the sake of making techy things like Apple's (AAPL) iPad (buzzword No. 2) and green energy products like wind turbines (No. 3). As emerging markets economies (No. 4) expand, their citizens will buy more phones and TVs and hybrid cars and stuff. They will want, needless to say, to be just like us...
...
But with the world seemingly on the verge of a big trade war (No. 5), China is restricting exports of the rare earths -- which has sent their prices soaring and fueled investor interest in alternatives.
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Brief History: China has blocked shipments of raw rare earth minerals to Japan since Sept. 21., and to the United States and Europe since Oct. 18.
(Source: NY Times)

And Today: Chinese customs officials, without explanation, allowed shipments to resume to all three destinations. The news was released about an hour and a half ago (12pm EST, I believe).

Crazy... Let's look at one stock in particular, MCP. It's a Greenwood Village, Colo., miner that is aiming to restart a California rare earths mine in 2012. Molycorp is the fifth-biggest holding of the Market Vectors Rare Earth ETF.

MCP is trading $34.62, down 10.2% with IV30™ up 6.9%. The LIVEVOL™ Pro Summary is below.

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Note the stock drop and vol pop. The company has traded 30,000 options today on total daily average option volume of just 3,020. Note that calls and puts are trading pretty much 1:1. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that action in Nov. It's sort of scattered. Note that the Nov 50 calls (30% OTM) are $0.10 bid. Actually, as of an hour ago, the Nov 55 calls were $0.10 bid. Here's my ever so eloquent tweet:

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Livevol_Pro Livevol
$MCP Nov $55 $call's dime bid... Crazy...
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Those calls are now no bid, and it's the 50 line that's dime bid. Whoever sold those, nice...

The Skew Tab snap (below) illustrates the vols by strike by month.

I wasn't smart enough to take a snap of the skew a few hours ago (boo), but it still exhibits a bit of an upside turn right now. It was much more abrupt when the 55 line was $0.10 x $0.20.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

The stock has gone from ~$12 on 7-30-2010 to over $40 today at one point in less than 3 months. The stock is actually more than $6 off it's high today.

This is cool, at least to me. Makes trading a bit more fun when there's a weird government to government battle wrapped in political season and some general random acts to boot. In terms of trades... I dunno. Sell the upside in MCP right? I mean, there's no risk that China changes their mind?... Wait... What?

This is trade analysis, not a recommendation.

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EchoStar (DISH) - Calls Trade, Vol Pops, Term Structure Diverges into Earnings

DISH is trading $19.58, up 0.8% with IV30™ up 8.5% ahead of earnings on 11-5-2010. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates that the Nov 21 calls are mostly opening (compare OI to trade size). We can also see that both Nov and Dec are up nearly 4 vol points, so both months are reacting.

The Skew Tab snap (below) illustrates the vols by strike by month.

A few things jump out at me here:
1. The front month (red) is well above the yellow. This is normal going into earnings, but we're still more than a week away, so it feels a bit early for that divergence if it's just based on earnings.
2. The upside skew in Nov (red) is bid - i.e. it bends upward. The skew in Dec (yellow) is sort of "straight-ish." Jan'11 shows more of a normal shape, though it's still kinda flat.
3. Check out the vol difference between the Nov and Jan'11 OTMs. Nov is nearly twice as expensive in terms of vol... Hmm...

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Two things I see here. First, the vol difference between IV30™ and HV20™ and HV180™. Second, look how much DISH moved on the last earnings cycle. Within a week(ish) it went from ~$21 down to ~$17.50. The realized vol shot way past the implied. I am guessing the rather pricey and early vol move now is in part do to that last cycle.

In terms of trades. I like spreading the months in the calls, but that last earnings cycle looms large. Feels like the stock could go up or down size and kill that calendar. Really, the front month ATM straddle for <= $1.80 kinda feels cheap... No?... Still, I can't get myself to think of it as a purchase.

This is trade analysis, not a recommendation.

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AMAG Pharma (AMAG) - A Spec Bet on Pharma Earnings

AMAG is trading $19.74, down 0.8% and earnings due out today after the close. The LIVEVOL™ Pro Summary is below.

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As expected, we can see elevated IV30™ coming into earnings. The ATM straddle in Nov is actually priced at 100 vol (10 points higher than the IV30™). I have also highlighted the last earnings cycle for AMAG where it moved huge in the two days following earnings (about $7 down).

For completeness, let's look to the Skew Tab (below).

Again, as expected, we can see a massive divergence between the Nov and Dec. Nothing necessarily "unusual" here.

Ok, now to the Options Tab (below). You'll note that there isn't a lot of trading in there right now, which isn't good in terms of liquidity, but what the hell, let's investigate a little gamble here.

Possible Trades to Analyze
Ok, here's the long shot, both in terms of getting an execution and then in terms of actually winning to it.

1. Do the Nov 19/20/21 call butterfly paying $0.10. This yields a max loss of the debit or $0.10 (excluding commissions and pin risk) and a max gain of $0.90. 9:1, decent. How about this....

2. Ok, Sell the Nov 20 straddle @ $3.90 ($1.85 in calls, $2.05 in puts). Buy the Nov 19/21 strangle for $2.95 ($1.40 in calls, $1.55 in puts). That leaves a net credit of $0.95 and max loss of $0.05, with max gain $0.95. Oooo, 19:1, that's nice.

With both these trades there is execution risk, and both are most likely losers. But... the butterfly (or condor) for 19:1 payout, feels like a small little bit that may be worth throwing the dice on... small...

Just to be clear, these trades for $0.15 or even $0.10 have a vastly different MaxGain:MaxLoss ratio, so a nickel difference is huge here. I intended this more as an example of what to look for in bio-techs on earnings. You'd be surprised at the prices you can get.

This is trade analysis, not a recommendation.

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Legal Stuff:
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Wednesday, October 27, 2010

Monsanto (MON) - Elevated Vol, Choppy Stock

MON is trading $59.73, up 1.3% with IV30™ up 13.9% The LIVEVOL™ Pro Summary is below.

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I found this stock using a real-time custom scan. This one hunts for high vols.

Custom Scan Details
Stock Price >= $7 <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

The MON Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see:
IV30™: 59.73
HV20™: 29.91
HV180™: 33.0

So, IV30™ is elevated relative to the short term and long term realized movement of the stock. Look at the stock chart, we can see that on 9-28-2010, MON gapped down nearly $5 on this news from AP:
"A Jefferies analyst said the yield of the agribusiness company's genetically modified corn seed has so far been weaker than expected."

This pushed the HV20™ above 49 at one point, but now enough trading days have passed where that move has rolled out of the average. Note that HV30™ is still 41.

Today there was an apparently positive report that the global seed business looks good going out a few years, stock has rallied a bit and vol is up a lot... Tricky... When it's all said and done, MON is now higher buy ~$4 than it was the day before the gap down.

Let's look to the Options Tab (below).

Possible Trades to Analyze
1. Sell the 60 straddle @$5.00 or ~41.5 vol. Ah, selling options feels so good... I mean, you know, when it works...

2. Pick a side of that straddle to "defend." Buying the Nov 57.5 put for $1.50 still leaves a net cedit of $3.50, so there is no downside risk. It's a winner below $60 at all prices. The upside though, has risk and loses naked above $63.50. To "defend" the upside, it's a bit more tricky. Only a 67.5 call exists. Fair value at 41 vol is ~ $0.40, maybe a $0.50 bid gets hit. That would leave a $4.50 credit, so the trade does lose above $64.50, but stops out at $67.5. The downside in this case would be naked.

3. Do a Nov 55/57.5 1x2 put spread and receive ~$0.02 to cover commissions. This is naked downside below $55, but maybe that's ok?... If MON decides to fall back down below $57.5 (but above $55), this can be a fancy little winner for a credit to enter the position (excluding margin).

This is trade analysis, not a recommendation.

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Legal Stuff:
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Avon Products (AVP) - Wild Skew and Vol into Earnings with Takeover Rumors

AVP is trading $33.34, up 1.6% with IV30™ up 26.5% into earnings tomorrow before the open. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates the action and how it's really focused on the call side in Nov.

The Skew Tab snap (below) illustrates the vols by strike by month.

Now we have something here. Very interesting skew shape going into earnings. The front month is completely inverted, a positive slope to the upside, and a downside that has lower vol by strike. To read what skew is and why it exists you can go here: Understanding Option Skew.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock gapped up on 10-11-2010 on speculation of takeover... again... Since then the IV30™ has been ripping, well above HV20™ and HV180™. Today it has peaked, over 26% up or 52 vol.

We can look at the Skew the day before the rumors (below):

So, normal... And then, the day after the rumors (below):

Pretty cool. Since that day, the skew has pretty much remained inverted, bid to the upside. It has become even more pronounced with the vol and order flow today. This upside skew makes for some very tantalizing trades, but ones that leave upside naked. Just a random example, the Nov 39/40 1x2 call spread can be done @ $0.25 credit. Whoa... A $0.25 credit for a call spread more than 20% OTM. Crazy... But, you know, the vols are priced like that for a reason...

It would be a neat little trick to announce a takeover with an earnings release.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:
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Blog

Friday, October 29, 2010

Alcoa (AA) - Skew Bends and Bullish Trades

EnCana (ECA) - Vol Explodes Again on Rumors

Avanir Pharma (AVNR) - Analyzing a PDUFA Date & Trades

Thursday, October 28, 2010

MCP - China Owns Rare Earth and Won't Share it? Stock Drops, Vol Pops

EchoStar (DISH) - Calls Trade, Vol Pops, Term Structure Diverges into Earnings

AMAG Pharma (AMAG) - A Spec Bet on Pharma Earnings

Wednesday, October 27, 2010

Monsanto (MON) - Elevated Vol, Choppy Stock

Avon Products (AVP) - Wild Skew and Vol into Earnings with Takeover Rumors

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