Thursday, September 1, 2011

Deutsche Bank (DB) - Time Spread and Vol Comps

DB is trading $39.34, down 2.8% with IV30™ up 1.1%. The LIVEVOL® Pro Summary is 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.

The stock just 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.

Let’s start with the Skew Tab to examine the line-by-line and month-to-month vols.

A couple phenomena, here. First, Sep is elevated to Oct on all strikes. Second, the downside skew in Sep (the slope) is greater (in absolute value) than the Oct options creating a widening vol diff to the downside. I’ve circled the downside put vol diff, above.

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 how DB has fallen off a cliff of late, like the rest of the market in a sense, but the recovery has not been as abrupt in this single name as it has been with the rest of the market. Note that DB is a giant European bank, so not necessarily the same systematic risk as US bank stocks. Having said that, it’s all kinda lumped together in terms of global financial risk with the banking giants.

On the vol side we can see a very similar pattern as we do across most US equities. The short-term realized historical vol (HV20) is greater than the IV30™ even though the implied is elevated relative to the long-term realized vol (HV180). Specifically:

IV30™: 59.95
HV20: 87.09
HV180: 42.02

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

I wrote about this one for (Options Profits), so no specific trade analysis here. Having said that, the downside skew vol diff looks compelling. Choosing the strike becomes the issue as the 32.5, 35, and 37.5 calendar put spreads all seem reasonable to examine. For what it's worth, the 52 wk low in DB is $37.44. I do note, however, that DB hasn’t really bounced off of the lows and is down another 3% (ish) today.

This is trade analysis, not a recommendation.

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