Shaw Group (SHAW) - Vol Explodes, Skew Holds Strong

SHAW is trading $37.78, down 4.1% with IV30™ up 11.6%. The LIVEVOL® Pro Summary is below.



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SHAW is a provider of technology, engineering, procurement, construction, maintenance, fabrication, manufacturing, consulting, remediation and facilities management services to a diverse client base that includes multinational and national oil companies and industrial corporations, regulated utilities, independent and merchant power producers, and government agencies.

I mean, they couldn't break that into two sentences?...

Anyway, with vol exploding, I found it on the 'IV30 One Day Increase' scan.

The company has traded over 5,000 contracts on total daily average option volume of just 1,443. The action has been in the Feb 38 puts, where over 1,900 have traded. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the puts are mostly opening (compare OI to trade size). They look like purchases to me, especially given the vol jump. Oddly, the only news I can find on SHAW is an upgrade a couple of days ago.



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



The skew looks pretty nice actually, normal(ish) with the front month elevated to the second. Earnings are not in either of those cycles (as far a I can tell).

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).



SHAW jumped on 11-29-10 (expanded global strategic partnership), dipped on 1-7-11 (earnings) and then spiked up again on 1-11-11 (spooky... all ones) from a share buy-back...

Possible Trades to Analyze
1. Get short some deltas in Feb:
Sell the Jan 37/38 call spread @ $0.50. Do the call spread rather than buying the put spread because the prices are slightly better given the width of the markets. This is simply a 1:1 MaxGain:MaxLoss bet that requires SHAW to close below $37.50 on Feb expo. Not in love with this trade.

2. Get short deltas, take on some risk:
Do #1 and sell the Feb 34 put @ $0.30. That leaves a net debit of $0.20, with naked downside risk below $33.50.

3. Calendar Spread:
Sell the Feb 37 put @ $1.00.
Buy the Mar 37 put for $1.60.
Pay $0.60 to own March.

Now that I think about it - I don't really like any of these trades that much. The skew just looks fair. This is one to watch, the skew can easily break down between strikes and months with the vol moving this much.

This is trade analysis, not a recommendation.

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Eastman Kodak (EK) - Vol Rips, Stock Drops on Patent Rulings

EK is trading $4.50, down 13.8% with IV30™ up 10.4%. The LIVEVOL® Pro Summary is below.



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The news for EK is included below:
-----
Eastman Kodak Co. was handed a setback by a U.S. trade agency in the camera company’s effort to force Apple Inc. and Research In Motion Ltd. to pay patent royalties on a common image-preview feature used in phones.

Kodak fell as much as 8.6 percent in late trading yesterday after U.S. International Trade Commission Judge Paul Luckern said Apple’s iPhone and RIM’s BlackBerry device don’t violate Kodak’s patent. The administrative law judge’s findings are subject to review by the six-member commission, which has the power to block imports of products that infringe U.S. patents.
Source: Bloomberg
-----

Yikes. I wrote about EK on 12-9-2010. You can read that article by clicking on the title below.
Eastman Kodak (EK) - Vol Rips, Calls Active on... Something?

Today, the company showed up on the IV30 One Day Increase scan. I've included the scan results below.



EK has earnings coming up tomorrow (ish), so the vol is elevated on the news above and the earnings report. Let's look to the Skew Tab.



So we can see a monster vol difference between the Feb and Mar 5 calls. It looks like about a 20 point vol divergence. Let's turn to the Options Tab.



Possible Trades to Analyze
1. Spread the Feb/Mar 5 calls
Sell the Feb 5 call @ $0.24 (~90 vol)
Buy the Mar 5 call for $0.31 (~71 vol)
Pay $0.07 to own March. I don't usually like selling earnings vol just for the sake of it, but risking $0.07 seems ok. Best case scenario, the stock goes to around 5 by Feb expo and this trade looks nice.

2. Bet on a rebound:
Buy the Feb 5/6 call spread for $0.18. This actually sells higher vol than it purchases in a call spread, which is unusual. The MaxGain:MaxLoss is 4.55:1.

3. Do #1, but with the 4 level puts instead:
Sell the Feb 4 puts @ $0.17 (~88 vol).
Buy the Mar 4 puts for $0.25 (~72 vol).
Pay $0.08 and bet that EK goes to around $4 on Feb expo.

NB: Both trades #1 and #3 lose to a big move on earnings (or after).

This is trade analysis, not a recommendation.

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Rare Element Resources (REE) - Vol Pops Again

REE is trading $12.79, down 1.2% with IV30™ up 10.6%. The LIVEVOL® Pro Summary is below.



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I wrote abut the Rare Earth debacle on 10-28-2010. You can read that post by clicking on the title below:
MCP - China Owns Rare Earth and Won't Share it? Stock Drops, Vol Pops

On 12-28-2010, I wrote this:
Rare Element (REE) - China's Decision Moves Industry

Since I know no one will go there, here is the old news:

----------------------------
12-28-2010
NEW YORK -- Shares of North American companies that mine rare earths jumped Tuesday in pre-market trading following China's announcement that it will cut exports of such materials by 11 percent next year.

China is the world's largest producer of rare earths, which are vital to manufacturing high-tech products such as cell phones, computer drives and hybrid cars. A drop in Chinese exports would boost demand for competing companies in the U.S., Canada and Australia.
Source: AP
------------------

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.
----------------------------

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)

10-28-2010: Chinese customs officials, without explanation, allowed shipments to resume to all three destinations.

I found this stock today using the IV30™ One Day Increase Scan. I've included the snap below.  One quick note, I can't find when earnings are for this company, so please do some howework on it if you want to trade it.



The REE 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™: 95.64
HV20™: 120.11
HV180™: 110.21

So, even at 95 vol, the IV30™ is depressed relative to the HV180™ (long-term realized) the HV20™ (short-term realized).

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



The skew looks pretty normal. I have highlighted the vol diff between the front month 14 line and the back two months. In particular, check out Apr.

Finally, let's turn to the Options Tab.



Possible Trades to Analyze
1. Trade the upside skew in a calendar:
a. Sell the Feb 14 call @ $0.60 (~87 vol)
Buy the Mar 14 call for $1.00 (~85 vol)
Pay $0.40.

b. Sell the Feb 14 call @ $0.60 (~87 vol)
Buy the Apr 14 call for $1.25 (~84 vol)
Pay $0.65 but get two months after Feb with the possibility of selling mar after Feb expo.

2. Naked vol purchase:
Wanna bet that the stock continues to move more than the implied?
Buy the Feb 13 straddle for $3.60.
I think I just threw up a little in my mouth.

3. Get long and take on some risk:
a. Buy the Mar 14 call for $1.00
Sell the Feb 15/16 call stupid (sell/sell) @ $0.60
Pay $0.40 for some upside potential and some upside risk (note that this is naked upside!). For the margin weary, here's an alternative:

b. Buy the Mar 14 call for $1.00.
Sell the Mar 15 and Feb 16 calls @ $1.00.
Buy the Feb 17 call for $0.15.
Pay $0.15, hope to get out of Feb with the stock near $15.

4. Trade the downside:
Since a stock can only go to zero, here's a risky play to the downside which sells skew but has a limited risk (at $0).
Buy the Mar 12 put for $1.60
Sell the Feb 10 put @ $0.40
Sell the Mar 10 put @ $0.70
Pay $0.50 for some downside with naked risk below $10.

This is trade analysis, not a recommendation.

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Alcoa (AA) - Vol Spike and CEO Outlook

AA is trading $16.17, up 2.4% with IV30™ up 8.8%. The LIVEVOL® Pro Summary is below.



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Some news this morning:
-------------------
Jan 24 (Reuters) - U.S. aluminium giant Alcoa expects continuous strong demand for aluminium this year driven by China and other Asian countries, the company's chief executive said on Monday.

"We continue to believe demand is going up, this year we project demand growth of 12 percent," Klaus Kleinfeld told reporters on the sidelines of a conference in Riyadh.

"China will be growing around 15 percent, last year 21 percent, we see a lot of emerging economies strengthening in places like Southeast Asia"...
Source: Alcoa CEO says demand to remain strong in 2011
-------------------

I found this stock using a custom scan I built searching for names where IV30™ is up at least 10% today. Buy the time I snapped it, the vol was up just below the 10% cut-off. 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 AA 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™: 33.87
HV20™: 26.18
HV180™: 35.03

So the IV30™ is in between the HV180™ (long-term realized) and the HV20™ (short-term realized). It's sort of "fairish." Finally, let's check out the Options Tab.



Possible Trades to Analyze
1. Get long some deltas but be vol neutral in Feb:
Buy the Feb 16/17 call spread for $0.40 buying and selling about the same vol level in a call spread. A MaxGain:MaxLoss of 1.5:1 with already $0.17 in parity.

2. Get long some deltas but be vol neutral in Mar:
Buy the Mar 16/17 call spread for $0.43. This costs just $0.03 more than Feb for another full month of time.

3. Sell the elevated vol in Feb:
Sell the Feb 16 straddle @ $0.98
Buy the Feb 15/17 strangle for $0.32.
Collect $0.66 creating a MaxGain:MaxLoss of 2:1. But, AA has to stay within [$15.34, $16.66] on Feb expo.

This is trade analysis, not a recommendation.

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NPS Pharma (NPSP) - Betting on a Bio-tech

NPSP is trading $7.23, down 2.5% with IV30™ up 0.2%. The LIVEVOL® Pro Summary is below.



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NPSP is a biopharmaceutical company focused on the development of new treatment options for patients with gastrointestinal and endocrine disorders and medical needs.

I believe that NPSP is scheduled to report Phase III data on the a drug candidate in Q1 of this year.

The company has traded over 9,500 contracts on total daily average option volume of just 1,074. The action is in May - right before some clinical data is supposed to surface. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates the action. It looks like sales of the May 5 and 6 puts and purchases of the May 10 calls.



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



I love the Aug skew shape - looks like fun to trade if you have any convictions as the vols are all over the place.

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 can do a little bit of the "up-down-up-down" game. The IV30™ is absolutely exploding as the news doesn't seem to have an absolute "due date," other than the first quarter of this year.

Possible Trades to Analyze
I'm not going to list any specifics, but here are some ideas to explore.

1. Bet that Feb vol is too high and that the news comes out after Feb 18th. Note that the option market reflects that the news will be out in the Feb cycle. This type of bet involves calendar spreads, buying "depressed" May vol and selling "elevated" Feb.

2. Bet with order flow. Check out some call spreads where the vol in the higher strike is above the vol in the lower strike (if possible).

3. Bet on a small move relative to the option implications. Sell the meat (ATM straddle or strangle) and purchase an OTM strangle to cover. Don't do it naked, please.

4. Bet on a big move. Buy a cheap (ish) OTM strangle and hope for crazy news which is definitive (i.e. very good or very bad).

This is trade analysis, not a recommendation.

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Sara Lee (SLE) - Earnings Bet and Vol Scalps

SLE is trading $18.55, up 1.5% with IV30™ up 1.3%. The LIVEVOL® Pro Summary is below.



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I wrote about SLE on 12-8-2010. You can read that post by clicking in the title below:
Sara Lee (SLE) - Vol Rips; Calendar and Skew Scalp On the Board

The vol was up and the upside skew was bid. Today there is more order flow to the upside, this time, very specific to earnings.

The company has traded over 18,000 contracts on total daily average option volume of just 4,826. The action is in the Feb 19 calls (long) and the Jul 20 calls (sales). The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the calls in Feb are not necessarily opening (compare OI to trade size). That interest to me actually looks short, so the OI should dip on these trades. The Jul trade volume is well above existing OI, so those look opening.

This Feb/Jul 19/20 call spread cost $0.15, and is interesting because earnings are due out in Feb. IMO, this is a bet on earnings and looks to be closed out after the report as there is also an earnings cycle in May - so the Jul options will likely not be left naked short.



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



We can see the Feb options are priced at higher vol than the other months due to earnings. Buying the Feb and selling the Jul is actually a 15 point reverse vol scalp (i.e. buying substantially higher vol than it sells). This phenomenon also leads me to be believe that this is an earnings bet. The lingering caveat is that the OI is short, so maybe this is a close in Feb to get short the juice in July. But the vol levels make that bet seem a bit weird to me.

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 that SLE stock can gap on earnings and on other news. Check out the bottom portion of the chart where the IV30™ is elevated to the historical realized vols by a pretty large amount. Buying 32 vol in Feb feels really expensive.

Possible Trades to Analyze
1. Calendar Spread the elevated Feb (earnings vol):
Not my favorite approach of all time to sell earnings vol, but the vol difference is pretty large.
Buy the Feb/Apr 19 call spread for $0.20.
NB: Apr has a dividend.

2. Calendar Spread Feb and buy some deltas:
2a. Sell the Feb 20 calls @ $0.20.
Buy the Apr 19 calls for $0.65.
Pay $0.45 to copy the order flow directionally, but own the back month vol instead of the other way around.
NB: Apr has a dividend.

2b. Sell the Feb 20 calls @ $0.20.
Buy the Jul 19 calls for $0.75.
This only costs $0.10 more and gets you two earnings cycles. This is my fav trade here for anyone that is bullish SLE, though the April one is nice too. Note that the Feb/Jul call spread has a MaxGain:MaxLoss > 1:1 if there is a large move during the Feb cycle (i.e. off of earnings).
NB: Apr and possibly July have dividends.

This is trade analysis, not a recommendation.

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Google (GOOG) - Earnings Preview

GOOG is trading $626.20, down 0.9% with IV30™ up 5.1% and earnings due out AMC today. The LIVEVOL® Pro Summary is below.



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Let's look at GOOG stock price history over the last 8 earnings cycles - the one day changes.



The one day range has been (-$45.16, $60.52), yet the average is basically no change i.e. $2.84.

Let's look to the Skew Tab.



As expected, we can see a monster gap between the one day "earnings only" options (Jan monthlies) and the Jan 28 weeklies as well the the Feb monthlies. The question is, how do you trade this beast?

The Options Tab (below) illustrates the prices as of ~ 2:20pm EST.



The one day earnings only straddle is worth ~$31.50 or ~116 vol. So, in English, the option markets reflect that the stock will move within that range (ish) ~68% of the time. And, yes, I know that's dependant on several likely untrue assumptions.

The average one day earnings straddle has been priced at ~135 vol over the last eight quarters (when relevant) with a range of [108.34, 174.87]. In other words, the vol as of right now is in line with prior earnings cycles.

Possible Trades to Analyze
Although GOOG has a small stock move on average, it really can gap. Just look at the last earnings cycle - it was the biggest move of the last eight.

1. Bet on a small move:
1a. Do the Jan 615/25/635 butterfly and pay $1.10. That yields a MaxGain of $8.90, but requires GOOG close inside ($616.10, $633.90). The MaxLoss is the price paid.  This actually feels expensive to me.  I like this for maybe $0.80 or less, not over $1.00.  Whatever the price, it's likely a loser, thus the large MaxGain:MaxLoss ratio.  The question really is, are the odds better than the payoff?

1b. Do the Jan 610/625/640 butterfly and pay $2.20. That yields a MaxGain of $12.80, and requires GOOG be inside ($612.20, $637.80) on close. The trade-off with number #1a of course is that it risks twice as much capital for that extra room in the PnL range.

The PnL chart for this butterfly is included below.


1c. Similar type bets but with the Jan28 (weekly) options.

2. Bet on a biggish upside move.
Buy the Jan 645/660 call spread for $3.90 with a MaxGain of $11.10.  Similar type bets to the downside are also on the board.  The one rule for me here would be that naked options (long or short) are not in play.

3. GOOG does have this odd tendency to pin near a strike on earnings. It's a phenomenon that has roped me into betting on earnings before. If you think the same pattern will repeat, pick a strike you think it's going to and do the butterfly around it (i.e. sell that strike 2x and buy the strike above and below to cover). Wider wings yield a larger PnL range but also risk more capital.

This is trade analysis, not a recommendation.

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F5 Networks (FFIV) - Stock Collapse and Skew Shift on Earnings

FFIV is trading $108.15, down 22.1% with IV30™ down 20.4%. The LIVEVOL® Pro Summary is below.



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FFIV shares slid after the Internet-traffic software company projected second-quarter revenue below Wall Street expectations. The weak forecast hit others in the network-equipment sector, with shares of RVBD and BCSI down as well.
Source: Market Watch

With the stock plummeting, I noticed an interesting Skew opportunity. The Skew Chart for FFIV is included below.



I'm lookin' at how wide the vol difference between the Feb and third month upsides opened up on the earnings news. BCSI and RVBD show vol diffs to the upside as well between Feb and March/Apr, with BCSI not as pronounced as FFIV. I've included RVBD and BCSI skew below for completeness.





Finally, the FFIV Options Tab is included below.



Possible Trades to Analyze
1. Trade FFIV skew:
Sell 1 FFIV Feb 130 call @ $0.80 (~49 vol)
Buy 1 FFIV Apr 130 call for $2.65 (~44 vol)
-- Other strikes are possibilities as well, the 130 line is just one play.
-- An extension/alternative is to sell the Jan 115 calls @ $0.45 for a 1.5 day trade. This is very risky.

2. Trade RVBD Skew:
This is a little trickier because RVBD earnings are due out in the Feb cycle, so be aware of the bet you're making if you do this.

This is trade analysis, not a recommendation.

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UPDATE: Apple (AAPL) - Earnings Review

AAPL is trading $341.25, up 0.20% with IV30™ down 18.5%. The LIVEVOL® Pro Summary is below.



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Yesterday I wrote about AAPL and the company's trading pattern on earnings. You can read that article by clicking on the title below:

Apple (AAPL) - Earnings Vol Trading Patterns and Steve Jobs News

The gist of the pattern was this:

The short "one strike above ATM" straddle has been a winner 9/9 times, with an average one-day gain of 20.8% and a relatively muted range of [14%, 28%]. The Stats are available in the prior post.

AAPL closed $340.65 yesterday, so the straddle that was one strike above ATM was the Jan 345 straddle. On close, that straddle was worth ~$15.45.

The Options Tab (below) illustrates the prices as of ~ 2:40pm EST today (1-19-2011).



We can see the Jan 345 straddle is now worth ~$6.90 so the sale and re-purchase one day later was a 55%(ish) winner. The Jan vol has come down 29.4 points, or 48% with the earnings report out. Feb vol is down 6.1 points, or 19%.

I've included the Skew Chart from yesterday and today (below).





Just an easy visual representation of how much the front month vol came down relative to Feb and March. Again, this is expected behavior.

Ultimately, the short straddle that's one strike above ATM proved to be a winner again. That makes 10/10. Keep in mind, even though the trade has won 10/10 times, that doesn't mean it's a good bet. To get a little statistical here, these are 10 samples from an unknown probability measure. A reasonable argument could be that the ~ 20% average win (from stats on prior blog) isn't enough to compensate for the capital risked.

We examined a number of butterflies to try to replicate the short straddle bet while not being naked short (or long) options.  Selling the 340 or 345 strikes proved to be a winner even after accounting for the cost to cover with the wings. The nice thing about earnings... there's an opportunity to gamble 4x a year... We'll re-visit AAPL again in April.

This is trade analysis, not a recommendation.

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