Friday, September 10, 2010

ArcSight (ARST) - Vol Diff Gaps in Front Two Months. One Week Bet Opens Up.

ARST is trading $35.50, with IV30™ down 4.3%. The LIVEVOL™ Pro Summary is below.

On 8-26-2010, this was the news:
(Reference from Story)
CUPERTINO, Calif. (TheStreet) -- Shares of security software maker ArcSight(ARST) surged almost 30% Thursday following a news report that the company is up for sale.

ArcSight Incorporated| ARST International Business Machines Corp| IBM EMC Corporation| EMC The Wall Street Journal reports that ArcSight has put itself on the auction block. Citing people familiar with the matter, the Journal says that potential buyers, including Oracle(ORCL) and Hewlett-Packard(HPQ) could pay up to $1.5 billion for the company. EMC(EMC), IBM(IBM) and CA(CA) are also possible purchasers, it added.

The stock went from $28.23 to $36.63 in one day.

I found ARST with a custom scan I built:
Last Stock Price >= $5
Front Month - Second Month IV >= 7 points
Average Option Volume >= 1,000
Industry <> Bio-tech
Days After Earnings >= 5 and <= 70

The Livevol Pro Options Tab is included below.

We can see that Sep vol is up 2 points today while Oct vol is down 1.3. There was already a substantial difference between second and front month vol, today that divergence opened up more than three more points.

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month and makes the point even more clearly.

I've highlighted the vol difference between the ATM Sep and Oct options. As of writing, a 21 point vol difference.

Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can see the gap up on the possible takeover news. When a takeover price for a stock is set, vol usually gets crushed as the expectation is that the stock will trade in a relatively tight range. That means being long vega can be a massive loser. Having said that...

Possible Trades to Analyze
Given the sharp difference in vols between the second and first months, a purchase of the Oct ATM straddle and a sale of the Sep ATM straddle is interesting.

Trade Stats:
Buy 1 Oct 35 straddle for $5.30
Sell 1 Sep 35 straddle @ $3.25
Total debit is $2.05.

This loses if there is a takeover or if the stock moves huge (like it did 8-26) in a day), vol crushes and the position is left long vega which goes to zero. It wins if the stock stays put right here for a week (i.e. through expo), then the position is left with an Oct ATM straddle for only $2.05.

It's an interesting bet with well defined risk.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. The position is left with an Oct ATM straddle for $2.05 plus the cost of closing the Sep ATM straddle.

  2. I say, run for cover. I presume there was a deal by Oracle (my 90% bet), but someone didn't like the price and "leaked" the information to the market to get more bids. Bad move. I think Oracle moved away from the table and the other guests never showed up. And why should they. HP is too busy with their other acquisition, I don't see a need by IBM or EMC (both of them doubling on their already existing portfolio from previous acquisitions). Granted their own products are not as good as ArcSight, but it still will not make sense. Since then many key employees have updated their LinkedIn profiles.......
    or in other words they have refreshed their own market appearance.

  3. This idea blew up in your face (and mine since I followed the trade) . ARST up 8.79 as to 43.89 as it is being acquired by HP for 1.5 Billion. Looks like buying a call spread or sell a put spread would have been a better idea.

  4. Yup. As I said:
    "This loses if there is a takeover or if the stock moves huge (like it did 8-26) in a day, vol crushes and the position is left long vega which goes to zero."

    We are in the midst of takeover fever it seems.