Monday, July 25, 2011

ETFC, AMTD - Vols Pop, Stocks Pop, Takeover Rumors and Pressure Heighten

AMTD is trading $20.54, up 4.7% with IV30™ popping up 26.8%. The LIVEVOL® Pro Summary is below.

ETFC is trading $16.54, up 5.8% with IV30™ up 8.8%. That LIVEVOL® Pro Summary is below.


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TD Ameritrade Holding Corporation (TD Ameritrade) is a provider of securities brokerage services and technology-based financial services to retail investors, traders and independent registered investment advisors (RIAs).

E*TRADE Financial Corporation (E*TRADE) is a financial services company, which provides online brokerage and related products and services to the individual retail investors, under the brand E*TRADE Financial. It also provides investor-focused banking products, primarily sweep deposits and savings products, to retail investors.

I posted on a note ETFC last week. You can read that post here:
E*TRADE Financial (ETFC) - Stock Pops on Citadel Push to Sell

The basic idea in that note was expressed best through the news snippet:

As Deal Journal colleague Brett Philbin reported, Citadel this morning disclosed its “continuing and significant dissatisfaction” with E*Trade’s financial performance and management. And Citadel wants the company to hold a special investor meeting to talk about steps to improve the company, including a possible sale.

Citadel shares are about 14% higher in pre-market trading, at $14.72.

Citadel owns 9.8% of E*Trade’s outstanding stock. When E*Trade was staggering under heavy losses from its mortgage portfolio in 2007, Citadel plowed $2.5 billion in cash into the company. Citadel also injected the majority of $1.7 billion in a late 2009 debt exchange. Citadel’s CEO, Ken Griffin, joined the E*Trade board.

But with E*Trade’s shares trading at a fraction of their 2007 adjusted stock price of more than $200, Citadel seems to have finally lost patience.
Source: WSJ Blogs: Deal Journal, written by Shira Ovide.

It turns out that AMTD may in fact be the "best" and most likely suitor for ETFC. Here's a news/commentary snippet from The Motely Fool.
If you had to handicap the race, TD AMERITRADE would be the odds-on favorite to land E*TRADE. In fact, The Wall Street Journal is reporting that TD AMERITRADE's board will be meeting Tuesday to discuss making a run at the rival discounter.
Source: Who Will Buy E*TRADE?, written by Rick Aristotle Munarriz.

So now we have a story. AMTD has traded over 6,600 contracts on total daily average option volume of just 1,856 with calls trading on a nearly 10:1 ratio to puts. ETFC has traded nearly 40,000 contracts with calls trading in a 5.6:1 ratio to puts. Both Stats Tabs snapshots are included (below), respectively.

I've included the ETFC Options Tab (below). We can see the sizable volume today in the Aug 18 calls where over 7,000 have traded against existing interest of just 1,397. That was in fact the front leg of this trade:
ETFC aug/oct 18 call spread paper paid .55 for 5k crossed

Color from Mike Bristow of Vtrader Group.

The Skew Tab snaps for both are (below) included below.

So ETFC shows the bid skew to the upside while AMTD is more "normal." There is an interesting vol inflation ("puffy belly") to the Aug 19 and 20 strikes in AMTD creating a potential calendar call spread to those ATM options.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

The most notable portion is the far right. We can see the Citadel push and the rumor mill have substantially pushed the stock and vol in ETFC. It's like the market is trying to will the stock to a takeover. Keep in mind, the last time this rumor stuff started with ETFC, the board decided that maximizing shareholder value meant holding off on a sale -- and that a year ago (ish).

Possible Trades to Analyze
I'm not a big pair trader, though the increasing vol to both companies feels like a divergence play could be reasonable to analyze. The "puffy belly" vol to the 20 strike in AMTD may yield an interesting calendar. The upside (OTM) calendar call spread in ETFC is also on tehboard -- though that long vega could turn into a loser pretty fast if this rumor fizzles.

This is trade analysis, not a recommendation.

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