Tuesday, December 14, 2010

Valassis Communications (VCI) - Vol & Stock Pop on Upcoming News

VCI is trading $35.56, up 2.5% with IV30™ up 5.6%. The LIVEVOL™ Pro Summary is below.

I noticed the stock because of it's vol and stock jump at ~3pm EST. The Tick Chart is included below. The top is the stock price, the bottom is the Dec vol.

I've circled the pop. Here's the news:
12:04PM Valassis surging after announcing it will issue guidance tomorrow Dec 15: Co announced today that it will host a conference call Dec. 15, 2010, at 11am ET to discuss its 2011 guidance. Valassis' 2011 guidance press release will be published before the market opens on Dec. 15.
Source: Yahoo! Finance

So, with earnings coming out, the vol popped - makes sense. But why did the stock pop? Hmm... Would a company surprise with an earnings announcement if it was bad news? I think the market has decided, no, it wouldn't. That means not only are earnings coming out, but now expectations are embedded in the options. Let's look to the skew tab to see what the Options market is reflecting.

Check out the upside skew in Dec (but not in Jan). Hmm...again...  Let's look at the Charts Tab and peak at the current vol level.


IV30™: 35.56
HV20™: 27.10
HV180™: 44.55
Jan IV: 40.29
Dec IV: 80.12

Possible Trades to Analyze
A standard calendar spread isn't really much fun here because it's just selling the earnings vol. Let's look at some slightly creative stuff:

1. Given the upside skew that has developed in the Dec OTM calls:
Buy the Dec/Jan 37.5 call spread (sell Dec/ buy Jan) for $0.85. This purchases ~40 vol and sells ~75 vol but it also has a positive delta. Ideally, VCI pops to $37.5 at expo for this trade.

2. The upside skew also brings about an interesting call spread within Dec:
Buy the Dec 37.5/40 call spread for $0.30. This purchases ~87 vol and sells ~ 105 vol. It's a $2.50 call spread for just $0.30, but... It's a bullish bet on essentially a one day move. The MaxGain:MaxLoss payout is 7.33:1, but the odds of winning are certainly less than 50%. The question is if the bad odds are overcome with a superior payout.

3. Feeling contrarian? Sell that upside in Dec naked. Risky...

This is trade analysis, not a recommendation.

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