Part 3 of 3: Skew Shifts on Takeover Rumors

This was originally posted on Wednesday, September 7, 2011 and is now a case study in a three part series on option skew. You can read parts one and two by clicking on the titles below.

Part1: Understanding Option Skew -- What it is and Why it Exists

Part2: Trading Option Skew

VRSN is trading $34.76, up 8.4% with IV30™ up 5.2%. The LIVEVOL® Pro Summary is below.



VeriSign, Inc. is a provider of Internet infrastructure services. It provides domain name registry services and infrastructure assurance services.

The stock has been popping of late on takeover spec. Here's a quick news snippet from Forbes.com written by Eric Savitz.

---
VeriSign shares are trading sharply higher for a second straight session after the company cancelled an appearance yesterday at a Citigroup technology conference.

ThinkEquity analyst Daniel Cummins reports in a research note that the company also cancelled a planned presentation at a technology conference his own firm is holding next week.

Cummins says he thinks the cancellations likely have more to do with the company’s CEO search than to potential M&A developments. He points out that the company since August has been run by Chairman and co-founder Jim Bidzos, who took over after former CEO Mark McLaughlin left to take the top job at Palo Alto Networks.

On the other hand, he also contends the company could make a good acquisition target.
Source: Forbes.com -- Update: VeriSign Rally Extends As Rumor Mill Heats Up
---

Well there you go. Takeover... Rumor... Again...

Let's turn to the Skew Tab and check out what is a very cool term structure and skew.



We can see a marked upside bid skew in Sep as the takeover rumors have pushed vol (and the stock) in the OTM calls. I've included the Skew Tab snap from 9-2-2011, below.



Awesome skew shape transformation. We can also see, when comparing the two time periods, how large a vol diff has opened up between the front month and the back two. Specifically, the Sep 36.25 calls are priced to 74 vol while the Oct 36 calls are priced to 47 vol. Said differently, Sep is 57% more expensive (in terms of vol) than Oct, and we're actually comparing a further OTM call in Sep.

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



We can see the stock rise of late. On 9-2-2011, VRSN closed at $30.01. As of this writing, it's up nearly $5 or 16%. On the vol side we can see that the short-term historical has been trading above the implied for a few weeks -- starting with the stock drop in early Aug. The short-term implieds and historicals are all sort of converging at around 50 while the long-term realized trend is substantially lower. Specifically:

IV30™: 50.74
HV20: 53.35
HV10: 47.86
HV180: 27.19

Finally, let's look to the Options Tab (below).



This is trade analysis, not a recommendation.

Follow @OphirGottlieb

Tweet


Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaims any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.