Home Depot (HD) - Elevated Vol

HD is trading $33.08, down 2.1% with IV30™ up 3.4%. The LIVEVOL® Pro Summary is included below.



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The Home Depot, Inc. (The Home Depot) is a home improvement retailer. The Home Depot stores sells an assortment of building materials, home improvement and lawn and garden products and provide a number of services.

I found HD using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 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 HD 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).



The stock dropped from $36.39 on 7-26-2011 all the way to a low of $28.13 on 8-9-2011 or 22.3% in a two week period in what was a 24.55 vol stock (that's an annualized vol number). Since then the stock has recovered to now in the low 30's.

On the vol side, we can see the IV30™ is now just under 40 (38.18) while the short-term and long-term realized vols are depressed to that level as the stock has found a bit of a quiet period (at least compared to that abrupt two week period). It's this relative quiet time of late that has created the vol diff between implied and realized. Specifically:

We can see:
IV30™: 38.18
HV20: 27.30
HV180: 25.98

The next earnings release for HD should be at the end of the Nov options cycle (or after).

Let's turn to the Skew Tab, below, to examine the month-to-month and line-by-line vols.



The skew doesn't show any kinks from one-sided order flow and the term structure itself is normally shaped. Note that the red curve represents the Oct 7 weekly options.

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



Possible Trades to Analyze
Selling the ATM meat and covering with the wings is a reasonable way to examine the elevated vol. Alternatively, the 52 wk range for HD is [$27.92, $38.54], selling the downside on a ratio with some space between the long and short strikes might be interesting as well.

This is trade analysis, not a recommendation.

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EU and US Financials - Vols and Risk Starting to Decouple?

Let's examine the largest US banks against their European counterparts, using BAC and C for the US proxies, and DB and UBS as the European proxies. We'll note an interesting divergence that is developing as the market is finally reflecting differing risk between the two. The LIVEVOL® Pro Summaries are included below.









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For quite sometime, there was a compelling argument that the EU and US were essentially trading in tandem -- with news from one moving news in the other and a two way causality. From the Summaries above, we can see similar vols, so that similarity in risk premium seems relatively stable, but, one thing has changed -- and quite significantly.

Let's look to the vol charts for these four firms -- these are two year IV30™ charts.









Ok, so, what are we looking at?...

First, the similarities:
For all four charts, the implied is substantially elevated right now relative to the last two years, in some cases nearly triple the values from the past.

For the top two charts (US banks), we can see that the IV30 has come down off of highs. Specifically:

BAC is 40% off of it's IV30™ high
C is 26% off of it's IV30™ high

For the bottom two charts (EU), the banks are at or near highs -- in the case of UBS, making a new high today.

DB is 10% off of it's IV30™ high
UBS is 0% off of it's IV30™ high (a new high today)

Not convinced of the diverging behavior, yet? Try this. The EU banks are actually showing realized vol in line (actually above) the implied. In other words, the option market reflected risk is pacing the actual movement of the stock almost perfectly. In the US, the stocks are actually moving with lower realized vol than the implied reflects. Specifically, the HV20/IV30™ ratios are:

BAC: 77%
C: 88%
---
DB: 103%
UBS: 102%

Just to show I'm not cherry picking -- here are the same ratios for WFC and CS:

WFC: 79%
CS: 133%

Same phenomenon. Using these two for the prior stat:

WFC is 27% off of it's IV30™ high
CS is 11% off of it's IV30™ high

Again, the same phenomenon as before, with US bank stocks further off of the IV30™ annual high than the EU stocks.

So what? It seems that the EU and it's "problems" are finally decoupling (slightly) from the US and its "problems." The causality is still two-sided, but the vol behavior (or risk as reflected by the option markets) is finally diverging. The EU is showing greater realized vol to implied while the implied makes new highs. The US is showing a dipping implied off of highs, which is still elevated to the realized movement of stock. Hmmm... What pair trades are now available?

This is trade analysis, not a recommendation.

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Pre-Market/Post Market: 9-30-2011

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Focus Media (FMCN) - Is China A State Backed Accounting Fraud Epidemic?

FMCN is trading $21.37, down 14.1% with IV30™ spiking up 33.9%. The LIVEVOL® Pro Summary is below.



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Focus Media Holding Limited (Focus Media) operates an interactive digital media network. The Company offers interactive digital media platforms aimed at Chinese consumers.

I can't find any company specific news about this company today other than the generic Chinese systematic report from DOJ. Here's a news snippet from WSJ:

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Chinese stocks are getting crushed today, partly because of a report that the US government’s investigation of their accounting is gaining some muscle power.

[...]

Many of these names have already been hammered on such concerns for several weeks now. Some of them have political risk at home to contend with, too, along with growing worries about the strength of China’s economy.
Source: Chinese Stocks Crushed on Report of DOJ Probe
---

For those of you new to this story, suffice it to say a number of Chinese stocks have had egregious fraud claims surrounding their accounting, including one in particular that threatened to not let Deloitte auditors leave the company premises with audit papers in hand. You can read more about that one here:
The Audacity of Chinese Frauds from The New York Times and written by FLOYD NORRIS.

IMHO, if there is a Chinese bubble, it has a risk of being several fold -- one is just a normal bubble, like we had. The other is an absolute unabashed outright government sponsored accounting fraud epidemic. Now, before we point fingers, need I remind us of... Enron, WorldCom, HealthSouth, Tyco, Global Crossing, Arthur Anderson, etc, etc.

Given that our NASDAQ fell ~70%, I would say that's possible in China as a catastrophic worst case. Yeah, 70%.

Let's start with the Skew Tab for FMCN (below).



We can see the front is elevated to the back. The ATM vol diff is ~5 points. To the downside it grows to over 25 vol points.

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



We can see this was a $27.41 stock on close 9-27-2011 and as I'm writing this it's already down to $20.35. The vol has absolutely exploded from 58.13 on 9-27-2011 to now 98.46 as I'm writing, or ~ 70%.

Finally, let's look to the Options Tab (below).



Potential Trades to Analyze
So here's the deal with these guys -- some of the Chinese companies have been halted for multiple months -- that leaves option positions absolutely ambiguous. Having said that, I have dabbled in a few of these names (couldn't help but sell that vol) so, ya know... Buyer (or seller), beware, but the stocks are at the very least interesting to analyze.

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Petroleo Brasileiro (PBR) - Elevated Vol, Earnings Vol Comp and Skew Diff

PBR is trading $23.60, up 1.0% with IV30™ down 3.5%. The LIVEVOL® Pro Summary is included below.



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Petroleo Brasileiro SA Petrobras (Petrobras) is a Brazilian integrated oil and gas company. It operates in five segments: exploration and production; refining, commercialization and transport of oil and natural gas; petrochemicals; distribution of derivatives, electrical energy, biofuels and other renewable energy sources.

This is a giant, with a market cap over $150 billion. I found PBR using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol. Add an earnings vol twist, and this becomes a compelling story.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 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 PBR 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 the stock has been cut in half over the last six months – that’s ~ $150 billion in market cap. On the vol side, we can see the implied is elevated to both short-term and long-term historical realized vols, and thus the scanner trigger. Specifically:

We can see:
IV30™: 50.94
HV20: 39.92
HV180: 39.40

Let's turn to the Skew Tab, below.



We can see the skew shape is normal, with the downside bid relative to the ATM and the upside strikes. I’ve highlighted the downside, where the front month vol is elevated to the back. Interestingly, the last two earnings cycle for PBR around this time of year were 11-13-2009 and 11-11-2010 with prior cycles on 8-14-2009 and 8-13-2010. This year, PBR released earnings on 8-15-2011, so it’s a reasonable guess that the next earnings cycle will be in the Nov options cycle (Nov 18 expiry).

In English, a stock that’s lost 50% over 6 months and earnings approaching has the possibility to own that earnings vol for less than the front month. On top of that, the implied is trading above the historical, making a vol sale even more… tricky…

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



I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here, but note that the 52 wk range is [$22.52, $42.38], meaning that PBR is right at the low. Taking into account that range, the elevated vol relative to historical and the vol diff between the earnings and non-earnings month, some interesting positions to examine arise.

This is trade analysis, not a recommendation.

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Pre-Market/Post Market: 9-29-2011

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Imperial Holdings (IFT) - Stock Falls 65%, Did Someone Know... Did Someone Cheat?

IFT is trading $2.27, down 64% with IV30™ up 110.9%. The LIVEVOL® Pro Summary is below.



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Imperial Holdings, Inc. (Imperial) is a specialty finance company with a focus on providing premium financing for individual life insurance policies issued by insurance companies and purchasing structured settlements backed by annuities issued by insurance companies or their affiliates.

Here's the news driving the stock price to the ground, provided by TheStreet.com.

---
[IFT] acknowledged late Tuesday it was served with a search warrant by the U.S. District Court of the Southern District of Florida, saying it fully cooperated with the exercise of the warrant.

Imperial further disclosed that both the company and certain employees, including its chairman and CEO Antony Mitchell, are being investigated by the District of New Hampshire, and that the probe relates to its life finance business.
Source: Imperial Holdings Sunk by Federal Probe, written by Michael Baron.
---

So, ok.. why does this matter?... How about this:

The company averages 34 puts traded a day with no single day greater than 125... ever... Until yesterday, when 1,948 puts traded. Specifically, the Oct 5, Nov 5 and Dec 5 puts traded 1,058, 422, and 210 times, respectively. That's 1,690 puts in the ATM strike. The Options Tab from the close of yesterday is included below.



Note the OI in those three lines (Dec isn't pictured): 0, 0, and... 0. Yup, zero open positions in any of those puts. The stock (and therefore options) halted midday, so the prices look crazy on close. Let's glance to the Options Tab today.



Of the 1,058 puts in the Oct 5 puts, it looks like 1,043 were purchases and 15 were sales (and thus 1,028 OI, today). The Dec 5 puts were entirely purchases, that's 210 bought, 0 (zero) sold. The Nov 5 puts look like all but ~50 were purchases. The prices paid in the Oct 5 puts were ~ $0.20. Those puts are worth ~$2.75 today. In English, that's ~1,000*100*($2.75 - $0.20) = $255,000 in a day in just those puts.

In an interesting article posted by the Palm Beach Post, we get a bit of the timing of the event:

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Updated: 3:35 p.m. Tuesday, Sept. 27, 2011
Posted: 2:26 p.m. Tuesday, Sept. 27, 2011

BOCA RATON — FBI agents and Boca Raton police closed the offices of finance firm Imperial Holdings on Tuesday as they executed a search warrant.

On Tuesday afternoon, an empty U-Haul truck was backed up to the entrance of the company's headquarters at 701 Park of Commerce Blvd., apparently ready to be filled with documents.
Source: FBI, police raid Boca Raton financial firm, written by Jeff Ostrowski.
---

As for the company's reaction to the news, here's a quote from the Dow Jones story: "The specialty-finance company said the action came as a complete surprise and it fully cooperated with authorities."

The first wave of trades in IFT came at 11:32am EST. That seems a bit early... The halt was announced at ~1:32pm EST. Someone really had their ear(s) open to this enormous $133 million market cap company which averages 40 options traded a day and pounced, huh?... Or wait?...

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Deutsche Bank (DB) - Earnings Vol Comp; Implied Tracks Historical, But Should It?

DB is trading $36.84, down 1.1% with IV30™ up 2.0% as of ~11:25am EST. The LIVEVOL® Pro Summary is included below.



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Deutsche Bank AG is a global investment bank. The Company offers a variety of investment, financial and related products and services to private individuals, corporate entities and institutional clients around the world.

This is another example of a phenomenon that’s starting to become common in companies with earnings due out in the Nov cycle. Specifically, the front month (Oct) is elevated to the earnings month because of the elevated risk right now. DB gets an extra special risk premium for Oct as Germany is poised to make a decision about Greece very soon.

Let’s start with the Skew Tab, below.



The skew shape is perfectly normal, pretty even. The point here is simple – the Oct vols are priced above Nov without exception. The last two earnings cycles in Oct for DB have been 10-29-2009 and 10-27-2010. With Oct expo on 10-22-2011, a reasonable bet could be that this year the earnings cycle will also fall in the Nov cycle (and out of the Oct cycle).

Let’s turn to the Charts Tab, below. The top portion is the stock price, the bottom is the vol (IV30™- red vs HV20 - blue vs HV180 - pink).



I’ve highlighted the recent stock pop in DB. What’s different about DB than several of the other companies that show the month-to-month vol diff with Nov below Oct is that the implied has actually tracked the historical realized vol (short-term). In English, the implied has been priced perfectly to actual stock movement (rather than an elevated implied to historical).

Let’s turn to the Options Tab for completeness.



I wrote about this one for TheStreet.com (OptionsProfits) so no specific trade analysis here. I do think that a calendar spread owning earnings vol for less than non-earnings vol feels like a reasonable position to hold. But, if the vol was also elevated to the historical and a position could be initiated to sell vol; i.e. be net short options, that could also be interesting. The issue with DB, for me, is that the implied is actually pretty fairly priced to the HV20 and I’m not sure of the impact of the German decision on Greece and its impact on DB (if any). I’d rather see implied be elevated to account for the uncertainty...

This is trade analysis, not a recommendation.

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Pre-Market/Post Market: 9-28-2011

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Maxim Integrated Products (MXIM) - Elevated Vol; Depressed Earnings Vol Phenomenon

MXIM is trading $24.84, up 3.1% with IV30™ down 3.0%. The LIVEVOL® Pro Summary is below.



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Maxim Integrated Products, Inc. (Maxim) designs, develops, manufactures and markets a range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of customers in diverse geographical locations.

This company has a similar vol term structure phenomenon as the earlier post on SAP. You can read that blog here: SAP (SAP) - Elevated Vol, Depressed Earnings Vol Phenomenon

Let's start with the Charts Tab, below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



The stock price is at around the same levels as late Jun/early Jul and has popped the last two days with the market rebound. The implied is trading above both the short-term and log-term historical realized vols, or in English, by that comp, vol is elevated. Specifically:

IV30™: 40.85
HV20: 35.64
HV180: 36.16

Let's turn to the Skew Tab, and uncover the same vol phenomenon as in SAP.



The front month ATM is actually just below the back, but to the downside puts we can see elevated vol in Oct to Nov. The last two years SAP has had earnings on 10-28-2009 and 10-27-2010. With an Oct 22 expiration, a reasonable bet is that SAP will have earnings after the Oct options cycle and in Nov.

Allow myself to introduce myself... Austin Powers... anybody? No?.. Ok... Here's a line from the last blog:
"This is a great example of a phenomenon that’s starting to become common in companies with earnings due out in the Nov cycle [but have elevated vol in Oct] due to the "fear factor" in Oct and the recent wild swings."  Yeah, what he said.. Or, what I said... Whatever...

Let's finally look to the Options Tab for completeness.



Possible Trades to Analyze
A bunch of interesting positions to analyze sort of pop out at me in this one (and SAP). They all surround selling Oct and buying Nov in the downside. Straight calendars, ratio calendars (selling more), and diagonal calendars all purchase the Nov earnings vol and sell the elevated non-earnings Oct vol for more (more vol, not more in $).

NB: The 52 wk range for MXIM is [$17.02, $27.90].

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SAP (SAP) - Elevated Vol, Depressed Earnings Vol Phenomenon

SAP is trading $51.60, up 3.4% with IV30™ down 6.1% as of ~11:15am EST. The LIVEVOL® Pro Summary is included below.



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SAP AG (SAP) is engaged in enterprise applications in terms of software and software-related service revenue. The Company’s core business is selling licenses for software solutions and related services to deliver a range of choices fitting the varying functional needs of its customers.

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



I’ve highlighted the recent stock pop, which seems to simply be the systematic risk – up with the market. On the vol side we can see that the implied is trading above both the short-term and long-term historical realized vols. Specifically:

IV30™: 44.35
HV20: 35.64
HV180: 36.16

I see a recent post from Briefing (http://www.briefing.com/) regarding the next earnings release: “Next earnings release: Oct 26 before market, confirmed. Capital IQ estimate: 0.60”

More on that in a sec… Let’s turn to the Skew Tab to examine the month-to-month and line-by-line vols.



This is a great example of a phenomenon that’s starting to become common in companies with earnings due out in the Nov cycle due to the "fear factor" in Oct and the recent wild swings. The front month vol and second month vols are nearly identical, but the downside skew is more bid in the front. In English, the opportunity to own earnings vol for less than non-earnings vol to the downside puts is possible. Tricky…

Finally, let’s turn to the Options Tab for completeness.



I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. I will say that given that the vol is elevated in SAP, being a bigger seller than buyer might be an interesting vol position to examine. But, the vol diff spread between the earnings and non-earnings months (i.e. Nov and Oct, respectively) is also interesting. Note that the 52 wk range in SAP is [$46.24, $67.71], so perhaps that can act as a guide for any downside positions.

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