Tuesday, March 27, 2012

Titanium Metals (TIE) - Takeover Rumors Spike Skew; Calls Trading

TIE is trading $13.98, up 1.7% with IV30™ up 1.9% as of ~10:50am EST. The LIVEVOL® Pro Summary is below.


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Titanium Metals Corporation (TIMET) is a producer of titanium melted and mill products. The Company has titanium production facilities in both the United States and Europe.

This is a vol and order flow note based on a rumor. Here’s the rumor:

09:52 EDT Rumor: Titanium Metals strength attributed to renewed private equity speculation

Source: Theflyonthewall.com via Yahoo! Finance.

On the news, the company has traded over 7,000 contracts on total daily average volume of just 1,878. Calls have traded on a 8.4:1 ratio puts, or in English, of those over 7,00 contracts, just 762 have been puts. The Livevol® Pro Stats Tab and day’s biggest trades snap are included below.

The Options Tab below demonstrates the Apr 14 calls are the most active with over 4,500 trading on OI of 1,525. The majority of those orders look like purchases and the size relative to OI indicates opening orders. Basically, the order flow is buying into this “rumor.”

Let’s turn to the Skew Tab to examine the month-to-month and line-by-line vols.

The shape of the front two months do show an upside skew to the OTM calls, which is to say, the order flow (OTM call purchases) has pushed the vol up. I took a look at the historical skew – namely 3-21-2012 and have included that chart below.

What we can see here is how the skew has a “normal” shape – with the vol dipping from the OTM puts to the ATM options and eventually to the OTM calls. This is the evidence that the order flow has affected the skew.

Looking back to the skew chart for today, we can also see how depressed the Apr vol is to May (and Jun). For the last two years, the calendar quarter two earnings date was 5-5-2010 and 5-5-2011, so it’s a reasonable bet that the next earnings release for TIE will be in the May expiry but outside of Apr. The options reflect that vol event and thus have pushed the back two months above Apr.

The final piece of this puzzle, and for me the most interesting, is the vol on a more holistic level. I have included the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

I wrote about this one for TheStreet (OptionsProfits), so no specific trade analysis here. On the stock side we can see a rather flattish period of late. The 52 wk range in stock price is [$13.08, $20.00], which means the current level is near an annual low.

But check out the vol – the implied is depressed to its own history. In fact, with a 52 wk range of [26.53%, 67.94%], the current level falls in the 5th percentile.

Looking back to the Options tab (at the top), we can see the monthly vols are 26.97%, 33.19%, 32.55% for Apr, May and Jun, respectively. That 33.19% would be the 16th percentile for IV30™, so still depressed even with earnings approaching (and a “rumor.”)

I do note the reaction today in the underlying., which is to say, the lack of reaction. The stock has been stuck in a quiet period and HV20™ is in fact lower than IV30™ at 23.53%. The HV30™ is just 20.97%.

This is trade analysis, not a recommendation.

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