Wednesday, September 28, 2011

Deutsche Bank (DB) - Earnings Vol Comp; Implied Tracks Historical, But Should It?

DB is trading $36.84, down 1.1% with IV30™ up 2.0% as of ~11:25am EST. The LIVEVOL® Pro Summary is included 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.

This is another example of a phenomenon that’s starting to become common in companies with earnings due out in the Nov cycle. Specifically, the front month (Oct) is elevated to the earnings month because of the elevated risk right now. DB gets an extra special risk premium for Oct as Germany is poised to make a decision about Greece very soon.

Let’s start with the Skew Tab, below.

The skew shape is perfectly normal, pretty even. The point here is simple – the Oct vols are priced above Nov without exception. The last two earnings cycles in Oct for DB have been 10-29-2009 and 10-27-2010. With Oct expo on 10-22-2011, a reasonable bet could be that this year the earnings cycle will also fall in the Nov cycle (and out of the Oct cycle).

Let’s 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).

I’ve highlighted the recent stock pop in DB. What’s different about DB than several of the other companies that show the month-to-month vol diff with Nov below Oct is that the implied has actually tracked the historical realized vol (short-term). In English, the implied has been priced perfectly to actual stock movement (rather than an elevated implied to historical).

Let’s turn to the Options Tab for completeness.

I wrote about this one for (OptionsProfits) so no specific trade analysis here. I do think that a calendar spread owning earnings vol for less than non-earnings vol feels like a reasonable position to hold. But, if the vol was also elevated to the historical and a position could be initiated to sell vol; i.e. be net short options, that could also be interesting. The issue with DB, for me, is that the implied is actually pretty fairly priced to the HV20 and I’m not sure of the impact of the German decision on Greece and its impact on DB (if any). I’d rather see implied be elevated to account for the uncertainty...

This is trade analysis, not a recommendation.

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