Thursday, September 29, 2011

Petroleo Brasileiro (PBR) - Elevated Vol, Earnings Vol Comp and Skew Diff

PBR is trading $23.60, up 1.0% with IV30™ down 3.5%. The LIVEVOL® Pro Summary is included below.


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Petroleo Brasileiro SA Petrobras (Petrobras) is a Brazilian integrated oil and gas company. It operates in five segments: exploration and production; refining, commercialization and transport of oil and natural gas; petrochemicals; distribution of derivatives, electrical energy, biofuels and other renewable energy sources.

This is a giant, with a market cap over $150 billion. I found PBR using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol. Add an earnings vol twist, and this becomes a compelling story.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). 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 IV30™ simply because earnings are approaching.

The PBR Charts Tab is included (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 has been cut in half over the last six months – that’s ~ $150 billion in market cap. On the vol side, we can see the implied is elevated to both short-term and long-term historical realized vols, and thus the scanner trigger. Specifically:

We can see:
IV30™: 50.94
HV20: 39.92
HV180: 39.40

Let's turn to the Skew Tab, below.

We can see the skew shape is normal, with the downside bid relative to the ATM and the upside strikes. I’ve highlighted the downside, where the front month vol is elevated to the back. Interestingly, the last two earnings cycle for PBR around this time of year were 11-13-2009 and 11-11-2010 with prior cycles on 8-14-2009 and 8-13-2010. This year, PBR released earnings on 8-15-2011, so it’s a reasonable guess that the next earnings cycle will be in the Nov options cycle (Nov 18 expiry).

In English, a stock that’s lost 50% over 6 months and earnings approaching has the possibility to own that earnings vol for less than the front month. On top of that, the implied is trading above the historical, making a vol sale even more… tricky…

Let's look to the Options Tab (below).

I wrote about this one for (OptionsProfits), so no specific trade analysis here, but note that the 52 wk range is [$22.52, $42.38], meaning that PBR is right at the low. Taking into account that range, the elevated vol relative to historical and the vol diff between the earnings and non-earnings month, some interesting positions to examine arise.

This is trade analysis, not a recommendation.

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