McKesson (MCK) - Repeated Earnings Bet on Day of News

MCK is trading $74.50, up 0.5% with IV30™ up 11.9%. The LIVEVOL™ Pro Summary is below.



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McKesson Corporation (McKesson) provides medicines, pharmaceutical supplies, information and care management products and services across the healthcare industry.

I think of this company as the little giant - a nearly $20 billion company that gets no pub... Sup with that?...

The company has earnings AMC today. It has traded over 10,000 options in the first four hours on total daily average option volume of just 1,204. Calls have traded nearly 2:1 to puts, with 6,100 Feb 75 calls trading. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size). When looking down the entire option chain for MCK, I don't see any OI larger than 1,700, so the Feb 75 action is very large. The trades look like substantially purchases. The next most active line is the Feb 72.5 puts. These look two-sided to me but possibly more sales than purchases.



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



We can see the front month is elevated to the back, as it should be with earnings due out today. A bit odd is that the upside isn't bent up. In fact, if anything, the Feb 75 line kind of looks depressed. Odd...

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 implied tends to trade over the short-term historical for the last few months. That vol difference now has really opened up with earnings vol. On the last earnings cycle (10-27-2010), MCK gapped up $3.50 (ish). The bet today is interesting because it's an expensive one. The buyer took a position on the ATM earnings calls - very gamma rich (as opposed to maybe the OTM calls). It is worth to note that this company only has 75 and 80 calls listed - nothing in between (like 77.5) to the upside.

Other than pure earnings bets, I don't see any obvious trades here - the skew looks too well behaved. I would have preferred a kink somewhere. It will be interesting to see if this order flow is right, though. Make a mental note if it is b/c last cycle the ATM calls were the most active right before earnings and well... ya know...

This is trade analysis, not a recommendation.

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Kulicke & Soffa Industries (KLIC) - Depressed Vol into Earnings

KLIC is trading $9.71, up 3.2% with IV30™ up 2.0%. The LIVEVOL™ Pro Summary is below.



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Kulicke and Soffa Industries, Inc. (K&S) designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits (IC), high and low powered discrete devices, light-emitting diodes (LEDs), and power modules.

I found this stock using a real-time custom scan. This one hunts for low vols. What's interesting is that while it shows up on a low vol scan, earnings are out tomorrow BMO.

Custom Scan Details
Stock Price >= $7
IV30™ > 1
IV30™ - HV20™ <= -8 and >= -40
HV180™ - IV30™ >= 7
Average Option Volume >= 1,200
Days After Earnings >= 32
Industry != Bio-tech

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.



The goal with this scan is to identify short-term implied vol (IV30™) that is depressed 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 purchasing depressed IV30™ relative to HV20™ simply because of a large earnings move.

The KLIC 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™: 55.30
HV20™: 70.87
HV180™: 63.47

So, IV30™ is depressed relative to the short term and long term realized movement of the stock. The HV20™ number is elevated because of a gap up a few weeks ago (circled in the chart). The move was based on an upgrade from Oppenheimer from what I can tell.

We can glance at the Skew Tab below.



The front month is elevated to the back as it should be given earnings are out tomorrow. Finally, let's look to the Options Tab (below).



Possible Trades to Analyze
1. Bet that front month vol is too low:
a. Buy the Feb 9/10 strangle for $0.75.

2. Buy vol and bet to the upside:
a. Buy the Feb 10/11 call spread for $0.30.

3. Buy Mar vol:
Mar vol is 13 points less than Feb. If 63 vol feels like a purchase, then 50 vol might feel even better.
Buy the Mar 9/10 strangle for $1.05.

4. Play it totally backwards:
Sell the Feb 10 straddle @ $1.10.
Buy the Feb 9/11 strangle for $0.45.
Receive $0.65 (MaxGain) and risk $0.35 (MaxLoss).

This is trade analysis, not a recommendation.

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Ultra DJ-AIG Oil (UCO) - Oil Moves, Bullish 2x Order Flow Comes In

UCO is trading $11.61, up 8.3% with IV30™ up 10.6%. The LIVEVOL® Pro Summary is below.



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The investment seeks to provide daily investment results (before fees and expenses) that correspond to twice (200%) the daily performance of the Dow Jones UBS Crude Oil Sub-Index.

The ETF has traded 17,200 contracts on total daily average option volume of just 3,873. Calls have traded on a 4.5:1 ratio to puts. The most active line is Feb 11, where nearly 8,500 calls have traded. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the Feb 11 calls are mostly opening (compare OI to trade size). I believe these are purchases.



It's interesting to note that just a few days ago, on 1-25-2011, a large put seller came in here in the Jul 11 and Feb 10 lines. In other words, this is the second day of pretty large delta bets to the upside. The largest trades from that day are included below. I believe OptionMonster wrote about that order flow a few days ago.



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



The skew is a touch rickety, but still normal shaped - no obvious bumps to trade. It is interesting that even with the vol pop today, the front month is lower than the back two.

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 ETF is prone to big moves. On the bottom, we can also see how the IV30™ (short-term implied) is popping of late though it's below the long-term realized vol (HV180™).

Possible Trades to Analyze
1. Buy some vol and bet on more big moves:
Buy the Feb 11 straddle for $1.20.

2. Sell the elevated vol:
Sell the Feb 11 straddle @ $1.15.
Buy the Feb 10/12 strangle for $0.50.
Collect $0.65 for a MaxGain:MaxLoss of 65:35. I've included the PnL chart on Feb expo for this one (below).



3. Get bullish on oil:
It's tough to get, but paying $0.50 in the Feb 11/12 call spread with the underlying at $11.50 or above could be a nice little coin flip bet, with a 1:1 MaxGain:MaxLoss ratio.

This is trade analysis, not a recommendation.

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Darling Int'l (DAR) - Vol and Stock Push Earnings Skew Backward

DAR is trading $13.51, up 4.2% with IV30™ up 0.2%. The LIVEVOL® Pro Summary is below.



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DAR provides rendering, recycling and recovery solutions to the United States food industry.

Just a quick note on this one. It's active today, with nearly 20x daily average traded in the first 20 minutes. The company has traded over 5,000 contracts on total daily average option volume of just 310. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates the action. The Mar 10 calls are trading on zero OI - all opening. They look like purchases to me. The Feb 17.5 puts look like sales to me.



The Skew Tab snap (below) illustrates the vols by strike by month. This is where it gets interesting.



We can see the Feb 15 calls have higher vol then the Mar 15 calls due to the upside skew in the Feb options. The cool thing here is that DAR has earnings out in the Mar cycle - i.e. an earnings event. The depressed vol in Mar to Feb is unusual.

Possible Trades to Analyze
1. Skew scalp in the calendar with calls:
Sell the Feb 15 call @ $0.20 (~51 vol).
Buy the Mar 15 call for $0.45 (~49 vol).
Pay $0.25 to own the earnings OTM calls on a vol scalp in a stock with bullish order flow.

2. Trade skew intra-month.
The Feb 12.5/15 call spread trades at about the same vol once adjusted for execution prices. Paying ~ $.120 yields ~ 1:1 MaxGain:MaxLoss.

3. Skew scalp in the calendar with puts:
Try the other side if you're not buying this upside movement and order flow.
Sell the Feb 12.5 puts @ $0.20.
Buy the Mar 12.5 puts for $0.50.
Pay $0.30 to own earnings vol.

This is trade analysis, not a recommendation.

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Freeport-McMoran Copper & Gold (FCX) - Upisde Skew Creates Vol Diff

FCX is trading $106.98, down 3.0% with IV30™ up 11.9%. The LIVEVOL® Pro Summary is below.



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Freeport-McMoRan Copper & Gold Inc. (FCX), through its wholly owned subsidiary, Phelps Dodge Corporation (Phelps Dodge) is a copper, gold and molybdenum mining company.

I found this stock using a custom scan I built searching for names where IV30™ is up at least 10% today. The scan details are below with a snapshot if you want to build it yourself in Livevol Pro.

Custom Scan Details
Stock Price >= 10
Average Option Volume >= 1,200
Days After Earnings >= 5 and <= 60
IV30™ Percent Change >= 10%
IV30™ >= 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.



The FCX 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).



IV30™: 40.12
HV20™: 29.74
HV180™: 42.26

IV30™ is rising and is almost as high as the HV180™ (long-term realized) and is well above the HV20™ (short-term realized). The interesting vol actually lies in the skew.

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



I'm interested in that vol difference in the upside skew between Feb and Mar. Finally, let's look to the Options Tab.



Possible Trades to Analyze
1. If you want to bet on a rise in gold and scalp some skew:
Sell the Feb 130 call @ $0.19 (~43 vol)
Buy the Mar 130 call for $0.64 (~38 vol)
Pay $0.45 to own some Mar to Feb and bet that FCX climbs to the $130 range.

2.Similar to #1, but take on more deltas:
Sell 1 Feb 129 call @ $0.22 (~43 vol)
Buy 1 Mar 125 call for $1.11 (~38 vol)
Pay $0.89 for Mar vs Feb and own a $4.00 call spread.

3. Putting on some risk:
Buy 1 Feb 120 call for $0.78.
Sell 2 Feb 125 calls @ $0.39.
Buy 1 Feb 130 call for $0.21.
Pay $0.21. I like this trade for a few reasons:
1. It only risks $0.21.
2. MaxGain is $4.79. This yields a 22.8:1 MaxGain:MaxLoss ratio.
3. Ok, I can't think of a #3...

The PnL chart for this trade is included below. One thing to note - this thing only wins on expo if FCX rallies pretty hard.



This is trade analysis, not a recommendation.

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Top Stories: (1) Japan and (2) US Financial Regulation

Let's try one of the broader blog posts again, see how it reads for you guys. Two stories caught my eye today. One is troubling, one is ridiculous.

1. Troubling: S&P cuts Japan's credit rating on debt concerns
AP came out with a story today out of Tokyo. Simply stated, S&P has cut Japan's credit rating to AA- from AA. For those keeping score, Japan is the third largest economy in the world behind the US and China (some people still have Japan as #2, I'm not tryin' to play favorites, I'm going off of what AP reported).

The reason behind the downgrade will sound familiar - sovereign debt. Ok, not interested in the story anymore? Try this on for size:

"The downgrade is a stern reminder to Japan that it faces consequences for letting its debt swell to twice the size of gross domestic product."

Yeah, 2x, that's not a typo. The article goes on to remind us that this debt ratio is worsened by the fact that Japan has "persistent deflation and a rapidly aging population."

Though Japan has some plans to remedy the situation, "S&P expressed little faith in the government's ability to make meaningful progress."

S&P did add a calming conclusion in their analysis:"S&P maintained its A-1-plus rating on Japan's short-term debt. It also said its outlook on the long-term debt rating is "stable," noting Japan's diversified economy, high foreign net assets and the yen's role as a key international reserve currency."
Source: AP
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2. Ridiculous: Goldman warns about resurgence of shadow banking



I love this article. The gist is simple - Goldy's number 2 (Gary Cohn) essentially warned: "Too much regulation risks driving risky financial transactions and other activities into the more opaque areas of the financial system."

Just to be clear, that's not what I think is ridiculous.

Without making a judgement call on one side or the other, this is the standard argument from the financial industry (doesn't mean it's wrong - they are certainly consistent). What I did find particularly interesting and bordering on ridiculous was a quote from Cohn: "Risk is risk, whether it sits in a regulated entity or not. My concern is that we are pushing it more and more from a regulated to a less regulated, more opaque sector."

Is it just me, or does that sound like Goldy is openly threatening our government that it will be doing the lion's share of the shadow banking itself? No?

Cohn went on to say: "There are parts of Basel III that are subject to local rules. Markets are very efficient and will find the more efficient location for transactions."

Umm... So, what's the problem?
Source: Reuters
---------

Believe or not, I'm not politically charged on this one. I don't think there's any doubt that financial regulation will have a cost on the industry and therefore our economy - though I do think the conversation kind of ends there and no one really asks what the cost of not having the regulation is. I mean, what costs us more - stifling regulation on finance, or losing $9 trillion in market cap in 6 months?

This is trade analysis, not a recommendation.

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China Biotics (CHBT) - Fraud or Good Earnings?

CHBT is trading $13.92, down 10.1% with IV30™ up 19.2%. The LIVEVOL® Pro Summary is below.



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China-Biotics, Inc. is engaged in the research, development, production, marketing, and distribution of probiotics products, which are products that contain live microbial food supplements.

On 1-21-2011, the stock dropped more than $3 or 17%. Then on 1-25-2011 the stock popped on an unexpected preliminary Q3 revenue release that was "good news." So, ok, all is fine then, right?... No...

Here's the news I found from a Seeking Apha contributor today: Chimin Sang.
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On Friday, China-Biotics' (CHBT) stock price took a dive on apparently no news. A news search in the China media, however, yields a piece of news charging that the company may have fabricated its revenue numbers. Coming from The First Financial Daily, an influential Chinese financial newspaper owned by the second largest news group in China, SMG, the news did not evade the shrewd eyes of some smart investors and made an impact on the capital market.

This investigation was sparked by some original financial analysis done recently (original, and Google translation) by Xiacao, a.k.a. Summer Grass, a famous independent Chinese financial analyst.
Source:Reasons to Avoid China-Biotics
----------

Uh oh...

The company has traded over 10,000 contracts on total daily average option volume of just 2,331. Puts have traded on a 3.5:1 ratio to calls. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates the action. Lots of stuff in the front month on the put side. The Feb vol is up 22 points, Mar is up nearly 16 and May is up ~10 vol points. We can also see the existing OI in the puts in Feb. A lot of those positions opened on the initial dip in 1-21-2011.



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



The skew looks pretty normal. It's notable to me that the upside skew isn't bid at all - the options market isn't reflecting a rebound this time.

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 movement of late - kinda down, up small, then down again. The IV30™ spiked - as it should have.

Possible Trades to Analyze
The puts are crazy expensive. The Feb 10 puts are worth ~$0.525 - whoa... The fricking Feb 5 puts are nickel bid.

In terms of a trade, I don't really see anything obvious here. The vol is really expensive, so if anything it's reasonable to analyze some short vega positions but covered.

For you vol buyers, the Feb 12.5/15 strangle costs ~$2.10. Given how the stock has moved of late, just owning that vol for a few days might become a winner, even if the stock doesn't move into the profit range.

This is trade analysis, not a recommendation.

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Alcatel-Lucent (ALU) - Front Month Calls Active on Popping Stock

ALU is trading $3.40, up 2.7% with IV30™ down 0.4%. The LIVEVOL® Pro Summary is below.



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ALU provides products, solutions, and transformation services offerings, which enables service providers, enterprises, governments and strategic industries (such as transportation or energy) globally to deliver voice, data and video communication services to the consumers.

The company has earnings on 2-11-2011.

The company has traded over 16,500 contracts in the first hour and a half on total daily average option volume of just 2,387. All but 117 contracts have been calls, yielding a 141:1 call:put ratio. The action is in the Feb 3.5 calls, which have traded nearly 15,000x. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size). The existing OI of 6,167 is pretty large.



Looking at the Level II pop-out for the Feb 3.5 calls, we can see that the existing OI opened substantially on 1-14-2011 (one trading day before 1-18-2011). The Level II pop-out is included below.



Turning to the Time & Sales Tab for 1-14-2011 and those calls we can see that they traded $0.14 on a $0.05 x $0.15 market. So, in my opinion, opening long positions. That means the purchases today (I think they're purchases) are double downs.



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



It's interesting that the vol in the 3.5 line is lower in the front month (earnings month) than the second month. This peculiarity leads me to have a touch of doubt about the direction (buy or sell) of the calls traded today, though I still feel like they're purchases.

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 has spiked up a few times over the last six months. In particular, it's gone from ~$2.90 to now around $3.40. On the vol side we can see that IV30™ is quite elevated relative to the short-term realized movement of this stock (HV20™) and the long-term realized movement of the stock (HV180™).

Possible Trades to Analyze
1. Copy Order Flow:
Buy the Feb 3.5 calls for $0.15. Even if the order flow is in fact a sale, the cheaper vol in Feb to Mar on an earnings cycle feels reasonable if you want to bet to the upside on a rallying stock.

2. A little trickier is to purchase the Feb 3.5 calls and sell the Apr 4 calls. If that can be done for $0.05, that's one way to play this. This will require a close on Mar expo though - probably don't want to be naked upside in this stock.

This is trade analysis, not a recommendation.

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