SII & SLB - SLB takeover Bid Coming; How Options, Skews React

SII is trading 37.65 up 4.30 (12.9%) with vol up 5 points. SLB is trading 63.75, down 2.06. The LIVEVOL™ Pro Summaries are below.





Here's the news from Reuters - click to enlarge (now on Livevol Pro):


So a bid is coming. "The deal would create an industry giant with revenues double that of rival Halliburton Co.", The Wall Street Journal said. This has a few implications.

(1) The short term downside for SII is much lower.
(2) The short term upside for SII is in flux.
(3) A deal this big has regulatory problems written all over it.

Here's how the options show you the same things as above through the skew chart (click to enlarge).

Skew Legend:
Red - Front month
Yellow - Second month
Green - Third month
Blue - Fourth month



(1) The red line (March Options) has a weird downward bending skew - like a reverse parabola as you get to the far OTM puts.
(2) The red line on the upside has a distinct upward kink - expectations are for ~$9 billion bid ---> ~$41.10 in SII. But maybe it's higher (or lower)?
(3) The vol is actually up today (see IV30™ in summary above) - this is far from a done deal.

Also note the distinctly lower monthly vol as you go further out (overlaid from the Options Tab near the bottom of the skew chart). This occurs b/c there is a legitmate chance this deal does go through, and options become worth parity (i.e. zero vol).

The Options Tab snapshot is included (click to enlarge). Note the action in the Mar 40 calls.


I'm not allowed to offer trade advice in any way. If you want to trade this, consider these questions as a guide:
(1) If there is regulatory approval required, how long does that usually take?
(2) What are the chances of approval? Is there a similar attempted deal(s) to compare to?
(3) Is there a potential for another bidder? You can read the blog on the AGU, CF, TRA saga (BLOG HERE) to see what happens when mulitple companies are involved. Typically prices rocket higher.
(4) Is there a potential for a rejection from SII shareholders to the SLB bid?

Taking these questions/answers - what is the fair price for the options in each month relative to each other? Setting a specific price can be hard (or impossible) - but comparing months to each other can be easier. Time spreads can be a great way to play these events - limited downside, beat the machines matching markets with each other with better analysis than a dopey quoting script. Then again - maybe they're right.

The basic approach we use on the floor when we trade this type of event:
(1) Create a few "likely" outcomes and assign stock prices to them
(2) Assign dates to the possible outcomes
(3) Assign probabilities to the above.
(4) See if your prices match the market
(5) Make cheap bets with big payoffs where you feel the probability distribuion is incorrectly priced.
(6) MOST IMPORTANT: If there's no opportunity according to your analysis - walk away.

This is trade analysis, not a recommendation.

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MSCI South Korea Index (EWY) - Bearish Bet (Assymetric Butterfly)

EWY is trading 46.62. The LIVEVOL™ Pro Summary is below.



The company has traded over 20,000 options today in the first hour on total daily average option volume of 6,704. The largest trade has been the Mar 41/43/46 butterfly (puts) accounting for 20,000 contracts. The Company Tab and day's biggest trades snapshots are included (click either image to enlarge).





This is a bearish bet that EWY goes to the short strike (43) by March expo. It's assymetric. The PnL charts is included (click to enlarge).



The skew chart is provided below (click to enlarge). You can see EWY has a standard looking skew smirk. I have highlighted which strikes were purchased and sold.



Finally I have included ther Charts tab snap (click to enlarge). You can see the recent rally in EWY. Note the pivot point for the rally was --- $43. That's the bet.



The bottom portion of the chart are the vols: IV30™ (red) vs. HV20™ (blue). The yellow shaded area charts the difference.

This is trade analysis, not a recommendation.

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Conseco (CNO) - Deep Calls Roll and What it Might Mean

CNO is trading 5.22; earnings are 2-25-2010 AMC. The LIVEVOL™ Pro Summary is below.



The company has traded over 22,500 options today in the first two hours on total daily average option volume of just 3,304. The largest trade has been the Feb 4/ Mar 4 call spread purchased for 0.10 (buy Mar / sell Feb) - no stock. The Company Tab and day's biggest trades snapshots are included (click either image to enlarge).





The Options Tab snapshot below (click to enlarge) illustrates what the trade is.



This closes the previous Feb 4 position and opens a new Mar 4 position. This occurs regularly with many stocks near expiration. It's called a "roll" - where the front month position is closed and rolled into the next month.

From the Level II pop out (click to enlarge) you can see the open interest in the Feb 4 calls jumped on 1-15-2010 (traded 1-14-2010) - which was also the Thursday before expo (just like today). The largest option trades from that day (1-14-2010) are also included (click to enlarge).





So why is this interesting if it's predictable? Since this trade occurs regularly, the unusual part would occur if the trade did not happen. In the pro world, for stocks where rolls are predictable, traders often believe that as call rolls continue, the stock's dwonside risk is limited. When the roll stops, the downside risk re-appears. Why?

The thought process is that if someone has done the research to own - in this case - 1.1 million shares (these are 95 delta options) and all of a sudden stops - it's probably not a good sign at the very least. There are many stocks which demonstrate rools - some calls, some puts, some deeps, some OTM (not as often). Each type can add a small ingredient to the overall analysis of the underlying movement.

The Charts Tab snapshot is included below for completeness. You can see that CNO can trade quite choppy up and down.



This is trade analysis, not a recommendation.

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Currency Shares Yen (FXY) - Dollar: Bet On Yen Closes; Euro Bet Opens

FXY is trading 109.02. The LIVEVOL™ Pro Summary is below.



The company has traded over 24,186 options today in the first two hours on total daily average option volume of just 2,370. The largest trade has been 8000 Mar 100 puts (bot) / Mar 105 puts (sold) / Mar 110 calls (bot). This trade has accounted for 24,000 of the contracts today. The Company Tab and Day's biggest trades snapshots are included (click either image to enlarge).





The Options Tab snapshot more clearly shows the trades - note the relatively large open interest on the lines that traded.



This is closing on at least some of those lines. As I 've shown before, multi-leg trades can more easy to understand if they are broken into pieces. This trade can be seen as:

(1) Buy March 110 Calls for 1.15
(2) Sell the March 105/100 put spread @ 0.25
Total position cost = 8000 * 100 * ($0.90) = $720,000.

So buy upside calls and fund it with a sale of a put spread. Clearly a bullish trade (or the closing of a bearish trade in this case). If FXY goes up, the dollar goes down relative to the Yen. Someone is paying $720,000 to close a bullish position in the dollar after this recent run up relative to the Euro. The PnL chart on March expo. is included (click to enlarge).



As an opening order, max loss is $4.7 million and this breaks even when FXY hits $110.90.

The skew chart for FXY is included (click to enlarge).


Currency skew is usually just a parabola - unlike equity option skew. In this case you can see an upward tilt - pushing the probability priced into the options up that FXY goes up (or dollar goes down relative to the Yen).

Interestingly the skew in the dollar vs the Euro has been showing the opposite recently. You can read that blog HERE

The Charts Tab snapshot (6 months) is included below (click to enlarge). The bottom portion is the vol chart: IV30™ v. HV20™. Note also the spike in FXY at the end of last year to the 115 range.



This could be seen as a de-coupling of dollar to Euro - with dollar stronger. Then a bet against the dollar relative to the Yen. Having said that, I don't want to "make up" too many "possibilities." Let the Euro and Yen trades stand for themselves.

This is trade analysis, not a recommendation.

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Valassis (VCI) - Unusual Vol (Straddle) Seller into Earnings

VCI is trading 25.67. Note that earnings are 2-22-2010 BMO. The LIVEVOL™ Pro Summary is below.



The company has traded over 10,800 options today in the first three hours on total daily average option volume of just 1,161. The largest trades have been the Mar 25 (ATM) straddles. ~9,000 of the contracts have been straddle sales. The Company Tab and Options Tab snapshots are included (click either image to enlarge).





The straddles were sold @3.80. The Options Tab snap (click to enlarge) shows that the puts are opening (small open interest) but the calls are not as clear. Note also the vol per month.



I looked up the opening trades on the Mar 25 calls - it seems that a bunch were part of some call spreads trading on 1-29-2010. The largest options trades for that day are included (click to enlarge).



It seems like the straddles today are opening based on the above. This trade feels weird to me:
(1) Earnings are coming soon after Feb. expo. but the Mar vol hasn't moved any higher than Jun. So a vol sale seems pre-mature.
(2) The Earnings & Dividends snap (click to enlarge) illustrates that in the Apr and Jul earnings cycles the vol as a backspread winner (purchase). In Oct cylce it was a sale. But I don't see a history of obvious vol sales.
(3) The Earnings & Div tab also shows that vol does creep up into earnings (as expected) especially in the last cycle - so why sell the straddle now?



I'm not saying this is a bad trade but I do think it's unusual - at least a little given the above. If the stock pins at $25 on March expo, 4500 straddes @ 3.80 turn into a $1.7 million winner. A Form 8-K was filed on 2-12-2010 with respect to some lawsuit - perhaps the cat was let out of the bag?

The Charts Tab snapshot (1 year) is included for completeness (click to enlarge). The bottom portion is the vol chart - red is IV30™, blue is HV20™.



This is trade analysis, not a recommendation.

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AGU, CF, TRA - It Takes 3 to Tango? Takeover Commotion & Trades

TRA is trading up 22.5% to 40.73. CF is trading up 2.7% to 103.25. AGU is trading up 2.5% to 65.89. The LIVEVOL™ Pro Summaries are below.







Here's a quick summary of the last year:

(1) 1-16-2009: CF bids for TRA $2.1 billion (all stock)
Proposed Exchange Ratio of 0.4235 Shares for Each Terra Share. Transaction Offers shareholders of Terra a Premium of 34% Over 30-Day Volume Weighted Average Stock Prices of the Two Companies' Respective Shares.
Reference Here

(2) 2-4-2009: CF goes hostile over TRA
CF Industries (Deerfield, IL) says it will launch a hostile bid for Terra Industries, and will nominate three members to replace three of Terra's current board members. The hostile bid comes after Terra's board rejected the $2.1 billion bid from CF Industries. Terra's board said CF's bid, which would allow the holder of each common share in Terra to receive 0.4235 shares of CF Industries, undervalues the company.
Reference Here

(3) 2-25-2009: AGU bids $72 per share for CF
Agrium Inc. (NYSE: AGU) submitted a proposal to the board of directors of CF Industries Holdings, Inc. (NYSE: CF) to acquire all of the capital stock of CF for cash and Agrium shares at $72.00 per CF share, or a total of approximately $3.6-billion, based on yesterday's closing price of Agrium shares.
Reference Here

(4) 5-11-2009: AGU ups bid to $82.50 per share for CF
Shares of AGU are trading lower today after the company increased its buyout bid for CF Industries (CF). AGU upped the cash portion of the bid to $40 per share, from $35. The deal is now worth approximately $82.50 per CF share.
Reference Here

(5) 5-18-2009: CF rejects AGU
CF Industries Holdings, Inc. (NYSE: CF) announced that its board of directors has rejected Agrium Inc.'s (NYSE: AGU) latest revised offer to acquire all outstanding shares of CF Industries.
Reference Here

(6) 11-05-2009: AGU ups-bid to $101.90 per share for CF
AGU offers one share of AGU + $45.00 in cash for each share of CF. This implies a deal value of $101.90 per CF share



(7) 11-19-2009: CF rejects AGU again
More than 60 percent of CF Industries (CF.N) shares were tendered into Agrium Inc's (AGU.TO) nearly $5 billion hostile offer for the fertilizer maker, but the majority as not compelling enough to convince investors that a deal is likely.
Reference Here

(8) 12-07-2009: CF re-ups (again) for TRA (8th time)
CF Industries (CF) is offering 0.1034 of a share as well as $36.75 in cash, including the $7.50 per share special dividend declared by Terra. This would value TRA shares at $45.91. The deal would be valued at $4.58 billion. The move is the latest chapter in a year-long, three-way takeover battle and lifts CF's offer to more than double the $2.1 billion it originally proposed in January4 and 12/7
Reference Here

(9) 1-14-2010: CF walks away from TRA
CF Industries Holdings Inc. (NYSE: CF) announced that it has withdrawn its hostile takeover bid for Terra Industries Inc. (NYSE: TRA), ending what has been a long and complex merger battle between the companies.
Reference Here

(10)2-16-2010: Yara bids $41.10 ($4.52 billion) for TRA
Yara International bids $41.10 per share of TRA (dividend already paid).


As we sit today, TRA is getting bought out for $41.10 (after the $7.50 dividend was paid) and the stock is trading close to that range. AGU is bidding 1 share ($65.89) + $45.00 = $110.89. CF is trading ~$6.50 below that right now. CF is committed to walking away from AGU; AGU is committed to buying CF.

TRA bid ostensibly more than doubled. CF bid went from $72 to now over $110.
Is there a way to trade this? Let's look at the headlines buy themsleves:
(1) CF bids for TRA $2.1 billion
(2) CF goes hostile over TRA
(3) AGU bids $72 per share for CF
(3a) CF rejects AGU (implied from news stories)
(4) AGU ups bid to $82.50 per share for CF
(5) CF rejects AGU
(6) AGU ups-bid to $101.90 per share for CF
(7) CF rejects AGU again
(8) CF re-ups (again) for TRA (8th time) (more than double prior bid)
(9) CF walks away from TRA
(10) TRA gets bid $4.52 billion from Yara

This is trade analysis, not a recommendation.

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VIX Skew - Market Collapse Impending?

The VIX is ~25.25 on today. The LIVEVOL™ Pro Summary is below.



There has been some talk recently about the VIX options skew and how it indicates a possible severe market downturn. The rationale is how the skew looks today relative to early September 2009 (before that market collapse). The Skew for today (2-12-2010) and 9-9-08 are included - click either image to enlarge. Note the level of the VIX highlighted in yellow and the dates on the charts.





The Charts Tab snapshot of the VIX (2 years) is included (click to enlarge). Not that we needed a reminder, but the VIX exploded above 80 after that 9-9-08 skew.



So the talk recently (from some) has been that the similar skew today represents a risk of similar explosion in the VIX (an implosion in the market). Fair enough. But how about a different angle?

I have included the Skew chart of the VIX from 7-7-2009 (click to enlarge). Note the similar (granted, not identical) shape to 9-9-2008.



The Charts Tab snapshot for that time shows of course that the VIX traded in a tight horizontal range after that skew - certainly no explosion. The chart is included (click to enlarge).



So, a skew as we see today isn't necessarily a guarantee of the future (good or bad). For completeness I have provided the skew charts from 10-27-09 (right at the height of insanity) and from 3-5-2009 (the market bottom). Note how much flatter the front month is relative to the prior snapshots.





Conclusion? The market is pricing in risk of a downturn - but that's no guarantee it will happen.

Per reader requests I have added the Vol chart with IV30™ (red) and HV20™ (blue) (the bottom section of the chart is vol). The yellow below that tracks the spread between the two. I chose HV20™ b/c it is measured in trading days, where IV is measured in calendar days (weird options market convention since forever) so IV30™ is ~ 22 trading days and tracks closer with HV20™ than HV30™. Click to enlarge.


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Allegheny (AYE) - First Energy (FE) Stock Merger

AYE is trading up 2.21 to 23.23. FE is down 2.46 to 39.00. Note that the IV30™'s are identical. The LIVEVOL™ Pro Summaries are below.





The news is presented below:


So a stock deal where AYE = 0.667* FE to close in a year+. Before today, AYE was trading 21.02 and FE 41.46 ---> 0.667*41.46 = 27.65 per share for AYE. That's a 27.65 - 21.02 = 6.63 spread.

Since the news the spread has converged significantly ---> 39*.0667 = 26.01. So 26.01 - 23.23 = 2.78 spread. 2.78 still indicates measureable uncertainty.

The Charts Tab snapshot for each is included (click either image to enlarge).





Notice FE dipping and AYE rising.

A few things to watch out for now.
(1) AYE vol should converge to FE vol as certainty grows - it can be higher if certainty dissipates, but it should generally not be lower (watch out for dividends and other special situations).
(2) AYE should approach (2/3)*FE
(3) Cheap vol bets (purchases) around deal closing if you are a seller of the deal (or if there is edge).
(4) Expensive vol bets (sales) if you are a buyer of the deal (or if there is edge).
(5) Good spreads stock to stock (in options).

Watch the options markets moving forward - line by line with the stock prices as well as the implied rates (divergence can cause hard to borrow rates - see TLB deal HERE for an example).

This is trade analysis, not a recommendation.

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