Thursday, August 9, 2012
Interpublic Group (IPG) - Takeover Rumors and Denial Bend Skew; Vol Diff Opens
IPG is trading $10.60, up 2.3% with IV30™ up 1.5%. The LIVEVOL® Pro Summary is below.
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The Interpublic Group of Companies, Inc. (Interpublic) is a global advertising and marketing services companies. Interpublic’s companies specialize in consumer advertising, digital marketing, communications planning and media buying, public relations and specialized communications disciplines.
This is a vol term structure note on a company that has had a volatile ride in the last couple of weeks from an earnings announcement and then a takeover rumor and subsequent denial. IPG came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.
Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1
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 back months that are cheaper than the front by at least 8 vol points. 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 front month vol simply because earnings are approaching.
I want to 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).
On the stock side we can see the abrupt drop off of earnings on 7-26-2012 (report was BMO). The stock fell from $10.99 to $9.90 or down 10% in a day. Then, on 8-3-2012, the stock popped from $9.68 to $10.97 or a 13% rise on news of a potential takeover bid from an European rival. Here's a news snippet from that day:
(Reuters) - French advertising agency Publicis Groupe (PUBP.PA) is weighing a bid for U.S. rival Interpublic Group (IPG.N), said a report by FT Alphaville on Friday, sending Interpublic's stock sharply higher.
Publicis is weighing a bid which could be worth at least $6 billion, FT Alphaville said quoting "usually knowledgeable" sources on Friday.
An equity valuation at that level would represent a premium of over 40 percent to Interpublic's market value on Thursday.
Source: Reuters via Yahoo! Finance Interpublic boosted by report Publicis weighing bid, reporting by Lionel Laurent in Paris, Sruthi Ramakrishnan in Bangalore, Jennifer Saba in New York; Editing by Mark Potter, Lisa Von Ahn and Sreejiraj Eluvangal.
On the vol side, we can see drop in the implied off of earnings (normal) and then the spike from the takeover rumor. The vol fell after the rumor on 8-6-2012 b/c of this news:
Aug 5 () - French advertising agency Publicis said it had not held talks with U.S. rival Interpublic Group, formally denying a press report that had boosted Interpublic's shares by 13 percent on Friday.
Source: Reuters via Yahoo! Finance; Publicis says held no acquisition talks with Interpublic
The stock fell from $10.97 back to $10.11 on 8-6-2012 (the first trading after the takeover rumor).
Let's turn to the Skew Tab (below) to examine the line-by-line and month-to-month vols.
We can see two obvious phenomena here:
1. The front month is elevated to the back as the option market reflects greater near-term risk than intermediate-term.
2. The upside skew in IPG is bid -- the option market reflects greater upside risk (potential) than downside risk in the near-term.
I've included the Skew Tab from 8-2-2012 as a reference point, below.
We can see that only one OTM option was even bid in Aug (thus the single data point dot rather than a curve). We can also see that the months were priced to pretty similar vol (overall). In other words, this takeover rumor (and subsequent denial) have affected the skew in a very real way.
Finally, let's look to the Options Tab (below).
We can see across the top that the monthly vols are priced to 57.18%, 46.25% and 43.70% for Aug, Sep and Oct, respectively. Notice how much that vol diff opens up when looking to the Aug/Sep 12 call spread. That's the affect of the takeover "stuff."
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--- DISCLAIMER --
This is trade analysis, not a recommendation.