Wednesday, June 11, 2014

* Anadarko Petroleum (APC) - Stock Explodes to 30-year High; Risk Doubles; Options Read: Upside Risk Right Now

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APC is trading $107.57, up 3.5% with IV30™ exploding up 48.5%. The Symbol Summary is included below.

Provided by Livevol

Anadarko Petroleum Corporation (Anadarko) is an independent exploration and production company.

This is a stock and volatility note for an equity that has just hit an all-time high (~30 years) while the implied volatility (the risk as reflected by the option market) has surged more today than any other company in the US market... and the catalyst: takeover rumors and a settled lawsuit.  But the reality has become, APC may be the next oil major.

The Charts Tab (all-time) is included below.

Provided by Charles Schwab optionsXpress

That chart really does tell it all.  At the lows of the bust, this was a ~$25 stock and today it has now crossed over $107.  The price today is in fact an all-time 30-year high.  But what happened?

Anadarko Petroleum (APC) has surged this year after resolving a lawsuit involving its purchase of Kerr-McGee. Now, there’s talk that ExxonMobil (XOM) could be interested in purchasing the independent energy exploration company.

Source: Barron's via Yahoo! Finance Anadarko Jumps on Takeover Chatter: Report, written by Ben Levisohn.

It's really the takeover rumor that has the stock moving, but there is so much more to this than the stock price.  It's  all about the option market's reaction.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days). We can see that just a few days ago the risk had bottomed to a multi-year low (see chart). But now... oh how things have changed.

The implied volatility (forward looking risk) has exploded from 19% to~35%, so nearly a double.  But there's even more...

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

Two phenomena:

1. Both expiries show an upside bend to the skew which is "abnormal" and illustrates that the option market reflects upside potential.

2. There is substantially more risk reflected in the Jun options than Jul (the yellow curve lies above the green curve).  Even further, that upside risk (aka potential) is abruptly higher in Jun (the right hand side of the yellow curve is a lot higher than the right hand side of the green curve).

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle in the Jun monthly options we can see that the option market reflects a price range of [$103.50, $116.50].

Does that feel right?

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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