Monday, September 26, 2011

Banco Santander (STD) - Elevated Vol; Downside Skew Backwards to Earnings

STD is trading $7.94, up small with IV30™ down 4.3%. The LIVEVOL® Pro Summary is included below.


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Banco Santander, S.A. (Santander) is a financial group operating principally in Spain, the United Kingdom, Portugal, other European countries, Brazil and other Latin American countries and the United States, offering a range of financial products.

I found this stock using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol, just like GME earlier today. This one includes an earnings date in a back month for a little "extra" interesting trade to examine.

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 STD 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 price has catapulted down since early August as the IV30™ has popped. Over the last few trading days, though, the stock has found a quiet time but the implied has remained substantially elevated. This phenomenon has created a large vol diff between the historical and implied vols. Specifically:

IV30™: 80.73
HV20: 55.67
HV180: 47.29

Let's turn to the Skew Tab, below.

We can see a relatively normal looking skew shape, with the front month slightly elevated to the back. The small diff opens up as we look to the downside puts. What's interesting is that STD usually has earnings on or about 10-27. This year the investor relations website reads that this year, again, on 10-27-2011: "3Q11 Results presentation." If we take that as an earnings announcement, then the Nov options have the earnings cycle but are priced to lower vol than Oct.

Taken a step further, this is a bank with a stock price down 33% in two months (ish) with earnings due out in a month and the front month has more expensive vol than the back. Hmmm...

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

Possible Trades to Analyze
1. Calendar
There aren't any obvious skew kinks here and really too many strikes to analyze here either. The trade that caught my eye in terms of one worth analyzing is either the Oct/Nov 7 or 6 put spreads. The 6 strike sells ~12 vol points higher than it purchases while owning earnings. The 7 strike is more like a 3 point vol diff, but still, interesting...

This is trade analysis, not a recommendation.

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