Friday, September 16, 2011

Rockwell Collins (COL) - UTX Jumbo Financing Pushes Vol and Stock in Takeover Candidate

COL is trading $56.60, up 8.6% with IV30™ popping up 31.8%. The LIVEVOL® Pro Summary is below.


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Rockwell Collins, Inc. (Rockwell Collins) is engaged in the design, production and support of communications and aviation electronics for commercial and military customers worldwide.

The news pushing the stock and vol is this:

SAN FRANCISCO (MarketWatch) -- Tyco International shares jumped 6% to top all S&P 500 advancers on Friday, rallying along with Ingersoll-Rand Co. Ltd. on a report that United Technologies is in the process of raising funds for a big acquisition. [...] The report also mentioned Rockwell Collins Inc., which helped push the stock up more than 4%.
Source: MarketWatch: Tyco, aerospace stocks jump on UTC takeover talk, written by Shawn Langlois.

Takeover spec on what seems to be acquirer news. COL has traded over 8,500 contracts on total daily average option volume of just 435. Calls have traded on a 6.1:1 ratio to puts, with the action in the Oct 60 and 65 calls. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size) on the Oct 65 line; more ambiguous but some opening on the Oct 60 line. When looking down the entire option chain for COL (excluding Sep), I don't see any OI larger than 1,599, so both lines are trading quite large for this issue.

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

We can see a slightly parabolic skew in Oct -- those calls (60 and 65 strikes) are bid up to order flow. The vol diff that has opened up between those strikes when compared to the back month(s) is significant at ~17 vol points. Keep in mind, the last two earnings cycles for COL at this time of year were 11-3-2009 and 10-29-2010, so selling Oct would likely not be an earnings vol sale and owning the back would certainly own it.

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 ripping of late, up from a low of $45.45 on 9-6-2011 to now $56.60. That's 25% in 10 calendar days. On the vol side, we can see the implied has actually jumped as the stock has moved up. IV30™ was 38.79 on 9-6-2011 and is now 48.52. That's a 25% pop as well.

Possible Trades to Analyze
Selling the elevated Oct vol and owning the lower Jan'12 vol allows a vol scalp while owning earnings. The danger is doing it one-sided (especially to the upside) as stocks that pop on these rumors often times fall back down fairly quickly, leaving that long back option worth less than the debit of the calendar. The downside calendar does show a vol diff as well, though not as pronounced.

This is trade analysis, not a recommendation.

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1 comment:

  1. Ha. again, im already in those. Managed to scalp the TYC side of the rumor aswell, although that opportunity is already gone ;)

    Love your soft. Pity cant (yet?) screen for "opt_vol > average > OI"