Monday, September 12, 2011

WFC, C, MS - Option Market Reflects Elevated Risk in Financials; Domestic and Abroad

WFC is trading $23.83, up 1.3% with IV30™ down 0.8%.
C is trading $26.61, down 0.5%, with IV30™ down 1.1%.
MS is trading $14.91, down 2.4%, with IV30™ up 4.4%.

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I found all three of these stocks using the real-time custom scan that searches for high vols. The scan details are below, and then we'll look at the Charts to understand what's happening in this industry relative to IV vs HV vol comps.

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 WFC, C and MS Charts Tabs are included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

Looking first to the vol underlyings, we can see almost an identical pattern starting from the end of July to the present. A dip, a slight recovery, than more downward momentum. I've included a comparison chart of the stock price returns for the all three stocks over the same time horizon (6 months), below.

Red: WFC
Yellow: C
Blue: MS

We can see WFC has performed better than its peers -- the other two are broker/brokerage heavy, but all three have been market under performers down at least 25%.

Let's look to the vol side. The similarities are striking. For all three, the HV20 (short-term realized vol) was well above the implied. But now, the implied has risen as the stock prices have "calmed." It's this divergence between realized stock movement and implied vol that has the companies appearing on the high vol scan. Let's look to a vol comp over the same horizon (and same legend).

The comp reveals even more clearly the similarities between the three vols, with WFC below the other two broker heavy stocks.

Ultimately, like the discussion of DB (and Germany) earlier today (Deutsche Bank (DB) - Option Market Reflects Tripling Risk in EU's Best Economy. "Uh Oh? Or Vol Sale?"), the option markets reflect double (or more) fold risk in these stocks than in April / May. The potential for pair (or triplet) trading seems less enticing given that the firms are behaving like one stock.

The conclusion... Much like the post earlier, if you're trading these, the question becomes: Is this "Uh, oh..." Or... "a vol sale?"

I dunno, you tell me... Either way, the financials may be leading this rally / weakening (depending on where it goes).

This is trade analysis, not a recommendation.

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