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
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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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