SPY - Falling Market, Popping Vol Opens Downside Skew

SPY is trading $113.14, down 3.0% with IV30™ up 10.2% as of ~11:20am EST. The LIVEVOL® Pro Summary is below.



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With the market catapulting down the last two days, vol has spiked 24%. And this is the S&P 500, not a bio-tech stock or a Greek bank (sorry for the cheap shot Greece). It’s that vol spike that has caught my attention. Let’s look 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).



I’ve highlighted the price drop and vol spike of late. It’s incredible how volatile SPY has been when looking at the stock chart. The HV20 hit as high as 49.69 and HV10 hit as high as 61.77. In English, at the peak of late, over a ten trading day period (two weeks),the SPY was moving at an annualized realized vol of over 60%. Whoa… Makes IV30™ of 35 feel cheap? Nah…

Let’s turn to the Skew Tab.



When the market goes down big, we can often find a vol difference that opens up between the front expiration and the back with respect to the downside puts. The threat (read: fear) of a cataclysmic decline pushes that tail risk up and therefore the front expiration downside puts tend to be sticky in price. That stickiness can only be expressed as increased vol. We are seeing that now – check out the vol diff between the Sep 23 (Weekly) puts and the Oct monthlies.

With a vol diff opening up, a short-term trade to sell it and cover with the back becomes a reasonable trade to assess. Let’s turn to the Options Tab for completeness.



I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. I do like the idea of this type of trade because of the vol diff. Having said that, I don’t like the trade for another reason; a simple one really. The fear of the “cataclysm” isn’t subsiding. If anything, it feels like the market is bracing for it as VIX has remained above 30 since 8-4-2011, even during times of market rebound. That means bad news may be digested in the long-run quite well, but in the short-run, it might be swallowed whole and push the markets down. And since we’re dealing with options that expire in one and half days, we’re definitely looking at the short-run.

This is trade analysis, not a recommendation.

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James River Coal (JRCC) - OTM Call Buying Explodes

JRCC closed yesterday at $7.74, down 14.6% with IV30™ up 10.6%. The LIVEVOL® Pro Summary is below.



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James River Coal Company mines, processes and sells bituminous, steam- and industrial-grade coal through six operating subsidiaries (mining complexes) located throughout eastern Kentucky and in southern Indiana.

With the market down size yesterday and again today (at least on open), here's an interesting order flow in the opposite direction. The company traded just under 16,000 contracts on total daily average option volume of just 1,298. Calls traded on an 11.5:1 ratio to puts with the action in the Oct 10 and Nov 9 calls -- substantially purchases on tiny OI. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the calls in both months are mostly opening (compare OI to trade size). The color in the Oct 10 calls I got was:
"JRCC Oct 10 Calls ppr paid .25 on 7k; xx-ed"

If you look at the largest trades snap, everything is Oct 10 or Nov 9 calls, with the Nov 9 all trading on the offer on $0.25 wide markets with AutoExec. Someone just swooped in and lifted the calls. When looking down the entire option chain for JRCC, I don't see any OI larger than 900, so both of these trades are huge. Today the OI is 7,405 and 3,884 in the Oct 10 and Nov 9 calls, respectively.



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



What's odd is that the skew doesn't really show a change in shape. I would have expected the upside to be bid in both months.

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).



We can see the stock has been falling hard of late. This was a ~$22 stock in late July and now it's trading below $7.50 as of this writing. On the vol side, IV30™ is up to 81.86 (up another 7.4%) as of this writing.

Possible Trades to Analyze
I dunno, but... that's a lot of call buying in a stock down 75%.

This is trade analysis, not a recommendation.

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Netflix (NFLX) - Is NFLX Going Away?... Or is it the 800-pound Gorilla? Option Market Reflects... Both?

NFLX is trading $127.33, down 2.1% with IV30™ down 3.1%. The LIVEVOL® Pro Summary is below.



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Netflix, Inc. (Netflix) is an Internet subscription service streaming television shows and movies... duh, Netflix!

Let's get right into it. The news is simple with regard to the stock, it's down a lot. 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 company peaked at $304.79 on 7-13-2011. As of this writing, it's down 58% in two months. Perhaps more dramatically, since closing at $208.71 on 9-14-2011 (a week ago), the stock is down ~40%. In those same two time periods IV30™ is up 74% and 61% respectively. More to the point, check out the IV30™ levels on these dates:

7-13-2011: 49.32
9-14-2011: 53.22
9-21-2011: 85.59 (today)

So what?... The stock drop from 7-13 to 9-14 of 31% was met with relative calm in terms of vol (up 8%). While the valuation of the company dropped, the risk (vol) associated with that valuation (stock price) did not increase very much. But, over the last week, the valuation has dropped 39% and the vol has exploded 61%...

Ok, ok. In English, while the news seems to finally be out, nothing is settled about the future of this company -- even the near term future (and yes, for those of you that read the Journal, I did just quote myself... sup?).

Let's turn to the Skew Tab to examine line-by-line and month-to-month vols.



For those of you new to NFLX skew, that parabolic shape in the front months is actually normal. The striking thing here, really, is that the skew looks normal (for NFLX). There isn't a bias to one side or the other, vol is just massively higher. That vol increase has made some of the downside puts almost... unbelievable...

Let's turn to the Options Tab, below.



I actually didn't include it in this snapshot, but the Jan'12 35 puts are priced at $0.65 x $0.68 with stock now printing $126.00. That's ~124 vol. Whoa...

All in all, the future of NFLX is in question, the valuation of this now "two part" company is in question, and the possibilities of much lower or much higher are both reflected in the options market. However, the downside is still priced to more risk as we move further out.

While there is a parabolic skew shape in the front, don't confuse that with the longer-term trend. Using $126 as the center, the 65 strike puts in Jan'12 are priced to 124 vol while the 190 strike calls are priced to 72 vol.

I hate to say this about a company whose customer service has been absolutely stellar, but... Is NFLX the next AOL? A trail blazer that didn't quite get it right and will be run over by newer technologies... Or is it the 800-pound gorilla that will prevail?...

Possible Trades to Analyze
As with all panics (founded or otherwise), the question is, what happens when calmer heads prevail? NFLX vol will eventually drop, but the stock might be $100 or more away from the current price when it does, making essentially any delta neutch vol sale a loser.

Near term sales (like the weeklies) are pure gamma plays -- but, the juice is rich so that's not necessarily a bad move, it's just a risky one. The ATM (125 strike) weekly straddle is worth ~$10 with $2.33 in parity. Considering the stock has moved $80 in seven calendar days, and just as of this writing (since the snapshots) has moved more than $4 on the day, maybe that's cheap?... Then again, 107 vol... doesn't sound cheap.

One position that seems interesting is owning that 125 straddle in the weeklies. For the bold, selling on a bigger ratio some wings with more than $10 difference in strikes might be... bold...

Longer term, man that vega feels rich, but really, is NFLX gonna settle as a $125 stock?  Would you bet for or against that?

This is trade analysis, not a recommendation.

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Lender Processing Service (LPS) - Elevated Vol and Earnings Date Ambiguity

LPS is trading $15.50, down 3.3% with IV30™ up 7.0% as of ~11:10am EST. The LIVEVOL® Pro Summary is below.



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Lender Processing Services, Inc. (LPS) is a provider of integrated technology and services to the mortgage lending industry, with mortgage processing and default management services in the United States.

The company caught my eye for two reasons, today:
(1) The implied vol is elevated relative to both the short-term and long-term historical realized vols.
(2) The vol in Nov is below Oct, but Nov likely has the earnings release which likely falls just after the Oct option cycle expires.

Let’s start with the Charts Tab (6 months). 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 has plummeted over the last six months, falling from a high of $32.79 on 4-7-2011 to now $15.50. That’s a 53% decline. The 52 wk low is $15.10 and that level was reached just a few days ago, on 9-12-2011.

On the vol side we can see that the implied trades above both of the historical measures almost all the time. As of now that vol diff has opened up as the HV20 is declining and IV30™ has popped today. Specifically:

IV30™: 69.77
HV20: 54.20
HV180: 39.48

The recent stock movement has been even more muted than the last twenty trading days, with an HV10 of 45.67.

Let’s turn to the Skew Tab.



The shape is similar for both of the front two months and it’s generally “normal.” What is interesting is that Oct is elevated (slightly) to Nov. The last two earnings releases at or around this date for LPS were 10-22-2009 and 10-28-2010. Last year the 10-28 release was preceded by a 7-22 release. This year LPS had earnings on 7-25, so it’s a reasonable bet (but not a sure thing) that earnings this year will fall after the 10-22 Oct options cycle.

Finally, let’s turn to the Options Tab for completeness.



I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. But, I will say that the elevated Oct vol relative to Nov is compelling if in fact the earnings report is after Oct expo. The vol diff with Oct GTE Nov opens up to the downside puts. I have a call in to the LPS investor relations dept., but no response back yet (I left a voicemail).

This is trade analysis, not a recommendation.

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MBIA (MBI) - Elevated Vol, Ripping Stock, Earnings Vol and Skew Comps

MBI is trading $8.77, up 4.2% with IV30™ down 2.3%. The LIVEVOL® Pro Summary is below.



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MBIA Inc. (MBIA) together with its subsidiaries, operates the financial guarantee insurance business.

The stock has been ripping of late, up from a low of $5.99 on 8-22-2011 to now nearly $9, less than a month later; that's 46% (to $8.77). Let's turn to the Charts Tab (6 months) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



I've highlighted two phenomena:
(1) The stock rise
(2) The vol levels (comps).

We can see that the IV30™ is substantially elevated to the HV20 and HV180, although the IV30™ has dipped with the stock price move up.

Let's turn to the Skew Tab.



We can see a rather pretty skew shape -- normal in all respects. The Nov vol is above Oct due to earnings in the Nov cycle. I did highlight the 6 strike -- the vol in Oct is right around the same level as Nov in both the 6 and 5 strikes. Keep in mind, it's Nov that has the earnings cycle (I think). Hmm...

Finally, the Options Tab is included below for completeness.



Possible Trades to Analyze
Selling that Oct downside vol given the recent run up and still elevated vol to HV measures seems reasonable. Covering the short vol in Oct with similarly priced earnings vol in Nov is also a possibility.

Taken a step further, selling the Oct vol and covering with Nov on a diagonal lowers the premium paid (though it does risk strike price difference). An example could be owning the Nov 5 puts against the Oct 6 puts... Of course, a catapulting stock into the small single digits on bad news makes that rather... ugly...

This is trade analysis, not a recommendation.

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Rubicon Technology (RBCN) - Elevated Vol Trend and Offered Puts

RBCN is trading $12.14, down 0.5% with IV30™ at 79.75 as of ~11:30am EST. The LIVEVOL® Pro Summary is below.



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Rubicon Technology, Inc. (Rubicon) is an electronic materials provider, which develops, manufactures and sells monocrystalline sapphire and other crystalline products for light-emitting diodes (LEDs), radio frequency integrated circuits (RFICs), blue laser diodes, optoelectronics and other optical applications.

The vol in this company is elevated and that’s what caught my attention. I found it on the elevated vol scan.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

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



A couple of things to note here:

1. The stock has fallen from as high as $29.79 on 4-27-2011 to now below teenager status, trading at $12.14. That’s a 59% drop in less than 5 months.

2. The implied vol has traded above the short-term realized vol essentially everyday for the last six months.

As of right now, the IV30™ is trading above both the HV20 and the HV180. Specifically:

IV30™: 79.75
HV20: 68.65
HV180: 57.09

It’s this vol difference that caught my eye. Let’s turn to the Skew Tab to examine the month-to-month and line-by-line vol comps.



We can see that Nov is priced above Oct (in terms of vol). Earnings are due out in early Nov, so the overall vol diff makes sense. Another point of interest, check out the vol in the Oct 10 puts. That depression is based on a $0.35 offer 289x.

Finally, let’s turn to the Options Tab, and make a trade.



I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. But, that elevated IV30™ to historical trend is compelling as is that offer in the Oct 10 puts as a potential cover to a vol sale.

This is trade analysis, not a recommendation.

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Range Resources (RRC) - Stock, Vol and Skew Pop on Takeover Spec... Again

RRC is trading $65.85, up 3.8% with IV30™ up 16.0%. The LIVEVOL® Pro Summary is below.



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Range Resources Corporation is an independent natural gas and oil company. The Company is engaged in the exploration, development and acquisition of primarily natural gas and oil properties, mostly in the Appalachian and Southwestern regions of the United States.

This is an order flow note based on some M&A spec but the result has been both elevated overall vol and a substantial upside skew in the front month.

The company has traded over 21,500 contracts on total daily average option volume of just 3,686. Calls have traded on a 9.6:1 ratio to puts with the action in the Oct 70 and 75 calls where over 11,000 contracts have traded. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the Oct calls are mostly opening (compare OI to trade size). The trades look like substantially purchases, today. When looking down the entire option chain for RRC, I don't see any OI larger than 2,400, so both of the calls are showing very large interest.



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



The most notable phenomenon to me is the upside skew in Oct; and these aren't nickel bids. The Oct 85 calls are $0.40 x $0.75. Those calls are 30% OTM after today's 5% pop.

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).



On the stock side, we can see the pop today. On the vol side, we can see that the implied is now higher than both the short-term and long-term historical realized vols. Specifically:

IV30™: 52.83
HV20: 40.73
HV180: 42.67

Possible Trades to Analyze
Upside skew sales, calendars or general vol sales seem reasonable given the vol comps presented above. Obviously, bets on a takeover are the predominant order flow now, so...

This is trade analysis, not a recommendation.

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Rambus (RMBS) - Vol up 300%, Options Reflect Greater Upside Potential Than Down

RMBS is trading $13.35, up small with IV30™ up 1.0%. The LIVEVOL® Pro Summary is below.



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Rambus Inc. (Rambus) is a property and technology licensing company. The Company’s primary focus is the creation, design, development and licensing of patented innovations, technologies and architectures that are foundational to all digital electronics products and systems.

The IV30™ is now above 155. The news pushing this stock surrounds yet another law suit. Here's a quick snippet from Briefing:

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BWS Financial says RMBS shares have been running higher this week in anticipation of the closing arguments in the anti-trust case beginning on Monday. Firm says the speculation in the market is RMBS would reach some sort of settlement with Hynix Semiconductor and Micron Technology (MU). A settlement is probably the best course of action for all parties, they say. For RMBS, a settlement would mean the ability to see cash. Right now, even if the jury was to side with RMBS there is no timeline as to when RMBS would see any of the damages, the firm says.
Provided by Briefing.com (http://www.briefing.com/)
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Let's actually start with the Options Tab (below) -- the pricing of the OTM options is extraordinary.



This is a $13 stock where the front month 7 strike puts are worth ~ $0.20 and the front 25 strike calls are worth ~$0.40. Whoa... Let's turn to the Skew Tab.



A couple of highly notable phenomena:
(1) The front month is elevated to the back -- the ATM vol diff is about 20 vol points. That crazy vol in the Nov 6 puts is simply due to a wide $0.08 x $0.47 market (vol priced to mid-market).

(2) The vol rises to the upside and it's essentially monotonic. In English, the option market reflects greater upside risk (potential) than downside. Putting numbers to it, the Oct 7 puts (which are $6.35 OTM) are worth ~$0.20. The Oct 20 calls (which are $6.65 OTM) are worth ~$0.82.

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).



Starting with the stock portion, check out the price drop on 5-13-2011. The news surrounding that move is well summarized by TheMotelyFool.com:

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Shares of computer memory technologist Rambus look like Rambo came by to slap them around today. At worst, the stock dropped more than 24% below Thursday's closing price after briefly posting a 12% gain.

This frenzy is fueled by an appeals court judge sending Rambus' patent infringement case against Micron Technology back to a lower court for reconsideration, based on Rambus shredding as much as 9 tons of documents possibly pertaining to the case.

Investors are left wondering exactly what Rambus wants to hide. The outcome of several other patent lawsuits may hinge on what happens to the Micron case, with cascading effects on the entire Rambus business model. Technology patents can be fertile grounds for serious business, as proven by Universal Display and TiVo, but Rambus runs a cloak-and-dagger version of that model where your investment lives and dies by the whims of a court.
Source: Rambus Shares Plunged: What You Need to Know, written by Anders Bylund.
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On the vol side, check out that "event vol." IV30™ has popped from 38.57 (on 7-22-2011) to now 155.20; that's greater than a 300% gain in less than two months as the court date has arrived.

Possible Trades to Analyze
There are four ways to play this essentially.
(1) Bet on a large drop.
(2) Bet on a large pop.
(3) Bet on a large pop or a large drop (two-sided).
(4) Bet on a delay (or something) that kills vol in the front or a result that moves stock less than the options reflect.

With creativity, each of these allow for either vol sales or vol purchases or both, either in one month or several months. Ultimately, the question becomes: are the ATM options under/over priced relative to the OTM options?

I dunno, but if there's a settlement, would either company agree (read: settle) to "something" that would make RMBS go below $6 or above $25? It seems that if the stock moves that aggressively, it wouldn't be a settlement, but rather a ruling... Or not?... How long does a ruling take relative to a settlement?...

This is trade analysis, not a recommendation.

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Rockwell Collins (COL) - UTX Jumbo Financing Pushes Vol and Stock in Takeover Candidate

COL is trading $56.60, up 8.6% with IV30™ popping up 31.8%. The LIVEVOL® Pro Summary is below.



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Rockwell Collins, Inc. (Rockwell Collins) is engaged in the design, production and support of communications and aviation electronics for commercial and military customers worldwide.

The news pushing the stock and vol is this:

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SAN FRANCISCO (MarketWatch) -- Tyco International shares jumped 6% to top all S&P 500 advancers on Friday, rallying along with Ingersoll-Rand Co. Ltd. on a report that United Technologies is in the process of raising funds for a big acquisition. [...] The report also mentioned Rockwell Collins Inc., which helped push the stock up more than 4%.
Source: MarketWatch: Tyco, aerospace stocks jump on UTC takeover talk, written by Shawn Langlois.
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Takeover spec on what seems to be acquirer news. COL has traded over 8,500 contracts on total daily average option volume of just 435. Calls have traded on a 6.1:1 ratio to puts, with the action in the Oct 60 and 65 calls. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size) on the Oct 65 line; more ambiguous but some opening on the Oct 60 line. When looking down the entire option chain for COL (excluding Sep), I don't see any OI larger than 1,599, so both lines are trading quite large for this issue.



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



We can see a slightly parabolic skew in Oct -- those calls (60 and 65 strikes) are bid up to order flow. The vol diff that has opened up between those strikes when compared to the back month(s) is significant at ~17 vol points. Keep in mind, the last two earnings cycles for COL at this time of year were 11-3-2009 and 10-29-2010, so selling Oct would likely not be an earnings vol sale and owning the back would certainly own it.

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).



We can see the stock ripping of late, up from a low of $45.45 on 9-6-2011 to now $56.60. That's 25% in 10 calendar days. On the vol side, we can see the implied has actually jumped as the stock has moved up. IV30™ was 38.79 on 9-6-2011 and is now 48.52. That's a 25% pop as well.

Possible Trades to Analyze
Selling the elevated Oct vol and owning the lower Jan'12 vol allows a vol scalp while owning earnings. The danger is doing it one-sided (especially to the upside) as stocks that pop on these rumors often times fall back down fairly quickly, leaving that long back option worth less than the debit of the calendar. The downside calendar does show a vol diff as well, though not as pronounced.

This is trade analysis, not a recommendation.

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