Tuesday, September 6, 2011

InterDigital (IDCC) - Elevated Vol, Patent Valuations

IDCC is trading $67.53, down 1.3% with IV30™ down 4.3% as of ~10:45am EST. The LIVEVOL® Pro Summary is below.


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InterDigital, Inc. (InterDigital) is a holding company, and its various subsidiaries engage in technology research and development activities or in the prosecution, maintenance, enforcement, and licensing of patents.

It’s that final phrase: “…enforcement, and licensing of patents” that is driving the stock price. Let’s start with the Charts Tab. 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 popped from $41.51 on 7-18-2011 to as high as $82.50 on 7-21-2011. Here’s a quick news snippet from 7-21-2011 that pushed the stock, but essentially it was that patent valuation that started the push.

“Boosted by M&A speculation; stock soared yesterday after it was announced that the co was exploring strategic alternatives.”
Source: Briefing.com (www.briefing.com)

IDCC has fallen back to the high 60’s but is still trading more than 60% above the stock price before the news.

The uncertainty surrounding the patent valuation and potential buyer has spiked the IV30™ to now over 120. It’s that vol that caught my attention. Let’s start with the Skew Tab and then look at the option prices.

We can see the front month is substantially elevated to the back. For the last two years, earnings have been on 10-28-2009 and 10-27-2010, so the elevated vol in the front is not earnings related. Let’s turn to the Options Tab.

The front month ATM vol (67.5 strike) is priced at ~155. In English, that’s ~$14.75 in the nine trading day straddle. Said differently, the option market reflects a ~$30 range for the stock as the one standard deviation move within the next two weeks.

I wrote about this one for TheStreet.com (OptionsProfits) so no specific trade analysis here. I will say that the risk reflected by the options can’t be ignored even though the HV10 is just 47.71.

We can also note that the wings, particularly the OTM puts, are priced at ~180 vol. For those willing to take on risk, a vol sale with a covered strangle and a short OTM put creates an interesting MaxGain:MaxLoss inside the strangle. Of course, it creates a cataclysm below the puts.

This is trade analysis, not a recommendation.

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