Tuesday, September 7, 2010

Brocade (BRCD) - Stock Up, Vol Pops & Skew Goes Backwards on Takeover Rumors

BRCD is trading $5.82, up 3.7% with IV30™ up an impressive 18.7%. The LIVEVOL™ Pro Summary is below.

An Oppenheimer analyst (Ittai Kidron) opined on the storage stock sector. Among his opinions, he felt that Dell would buy BRCD now that hey are out of the 3PAR (PAR) running, losing out to HPQ.

BRCD has traded over 131,000 options in the first two hours on total daily average option volume of just 16,348. Calls have traded 123,000 times for a 15:1 call:put ratio. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates the action. Basically calls are trading, substantially purchases, some risk reversals (buy calls/sell puts) as well.

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month.

We can see a rare occurrence here. A "normal" stock (not bio-tech, solar or currency ETF) where the skew is completely backwards. The upside is bid relative to the downside. To read what normal skew is and why it exists you can click here: Understanding Option Skew.

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). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

The stock hasn't been real exciting.

Possible Trades to Analyze
Naked buying the upside calls is a bit too expensive for me given the backwards skew. If you like a cheap upside bet for a takeover or stock jump:

An Oct 7/8 call spread for $0.10 could be a good "gamble." Likelihood is it's a loser, keep that in mind. A 5/6 or 6/7 call spread could be ok too given the skew. Even 1x2 to create a call spread for a premium could be in order, but beware the naked upside if there is a takeover or stock pop. Also, wider call spreads might be in order, like 5/7 or 6/8.

For the bears out there, the puts are actually cheaper than calls.

This is trade analysis, not a recommendation.

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