Two Harbors (TWO) - REIT Vol Breaches Annual High on FED Stimulus Action; Stock Dropping Hard

TWO is trading $10.60, up 4.4% with IV30™ up 17.4%. The LIVEVOL® Pro Summary is below.



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Two Harbors Investment Corp. (Two Harbors) operates as a real estate investment trust (REIT). The Company is focused on investing in, financing and managing residential mortgage-backed securities (RMBS), residential mortgage loans, residential real properties, and other financial assets.

This is a very quick vol and stock price note in a REIT that has beached an annual high in IV30™ and has been catapulting lower in stock price of late. Before we get into this specific name, here's some evergreen news on REIT's of late:

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The Vanguard REIT ETF -- which tracks the performance of an index that measures the performance of publicly traded equity REITs -- has stalled after the Federal Reserve in September announced plans to purchase $40 billion in mortgage-backed securities a month. Five Star Equities examines the outlook for diversified REITs and provides equity research on Hatteras Financial Corp. ( NYSE : HTS ) and Two Harbors Investment Corp. ( NYSE : TWO ).

Investors have long been attracted to the high yields of mortgage REITs, which currently averages around 13 percent, nearly 7 times the average dividend yield of the S&P 500. The Fed's announcement has caused drops in spreads, bond yields and homeowner's borrowing costs, and as a result company's earnings and dividends have been under pressure.

"Through the use of leverage, these REITs have yields in the midteens. At this time, mortgage REITs are benefiting from historically low short-term rates, but tightening spreads, or a sudden freeze in the credit markets, would have a significant negative impact on these firms," Morningstar analyst Patricia Oey wrote in a report.

Source: Five Star Equities via Yahoo! Finance; REITs Begin to Struggle as Stimulus Measures From the Federal Reserve Pressure Spreads and Bond Yields Lower.
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Let's look at the Charts Tab (one year) for TWO, 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 how abruptly the stock has declined of late. On 10-25-2012 the stock closed at $11.97. As of this writing, the stock is down 11.4%, and keep in mind, the yield is likely in the single digits. The 52 wk range in stock price is [$7.66, $12.20].

On the vol side we can see how the implied has spiked of late, in particular today. The 52 wk range in IV30™ is [8.43%, 34.59%], so the level today is in fact a new annual high. Back in Sep of 2011, the implied actually rose into the high 50% range, so the level today is not a multi-year high.

Let's turn to the Skew Tab, below.



We can see a notable vol diff between the Dec and Mar'13 options. The REIT systematic risk is certainly in play and the option market reflects that risk in the near-term rather substantially.

Finally, let's turn to the Options Tab.



Across the top we can see that Dec is priced to nearly 35% while Mar is priced to just 24.6%. In the REIT wold, this is a very large vol diff.

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Facebook (FB) - Largest Lock-up Period Ends But Stock Rises and Vol Falls; Is Vol too Low?

FB is trading $21.89, up 10.2% with IV30™ down 6.3%. The LIVEVOL® Pro Summary is below.



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Facebook, Inc. (Facebook) is engaged in building products to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about. Ya know... it's Facebook...

This is a stock and vol note -- but really it's focused on the lock up period ending that will essentially double the number of shares of FB on the market. But... the stock is up and vol is down.

Here are some news snippets to paint the picture of the happs:

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Pssst... wanna buy 804,000,000 shares of Facebook (FB)?

Shareholders of the social networking king hope the answer to the above is yes, as yet another share lock-up ends today. It's the latest in a series of shares freed up for early investors to sell in the open market. The 804 million shares potentially coming for sale today compare to 500mm in other post-IPO sales and 421 million shares at the $38 IPO price last May.

With Facebook's stock down nearly 50% from its IPO price and still groping for a bottom, the question is why outsiders would once again want to line up to buy what savvy insiders with greater information want to sell. On August 16th 271 million shares held by investors and directors involved in the IPO were unlocked and shares dropped 6% on massive volumes, closing in the teens for the first time.

Today marks the biggest potential liquidity event remaining in the company's roughly 1.5 billion post-IPO share release.

Source: Yahoo! Breakout via Yahoo! Finance; Facebook Shares: Should Outsiders Buy What Insiders Are Selling?, written by Jeff Macke.
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The thing is, FB is up kinda size on the news. Here's some more news/analysis:

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In August, Yelp shares skyrocketed by 25% the day its lockup restrictions on insiders expired.

Well, the same storyline played out today for Facebook, with shares jumping by as much as 11% on its own IPO lockup expiration.

We're talking about a total of 804 million shares that are now permitted to roam around the cabin freely. This is by far the biggest block of shares related to the IPO that are being unshackled, so most were expecting some selling pressure. That nearly doubles the amount of shares floating around out there, which was approximately 921 million before today.

Just because insiders can sell doesn't mean they have to, and the lack of selling pressure today implies they think shares are too cheap. That's a positive side for us outsider investors who aren't privy to as much detail to Facebook's inner workings.

This lockup is the biggest but it's also not the last. There are two more lockup expirations on the horizon,

Source: The Motley Fool via Yahoo! Finance; Facebook Sends the Lockup Expiration Bears Packing, written by Evan Niu, CFA.
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All very odd... Let's look to the Charts Tab (six months), 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 poor performance since IPO that's been widely discussed. The close on day 1 of public trading for FB was $38.23 (with an intra-day high price of $45). As of this writing, the stock is down 43% from it's opening day close. The all-time range in stock price for FB is [$17.55, $45.00]. I do note that the last earnings release was 10-23-2012 AMC and the next day the stock popped from $19.50 to $23.23 or just under 20% in a day.

In order to examine the vol a little more closely, I've included the IV30™ chart in isolation.



We can see how elevated the implied got into earnings (note the blue "E" icon). But more than that, check out the recent drop in vol. While other lock-up periods have shown rising vol (and dipping stock), today we see the complete opposite. The all-time range in IV30™ for FB is [44.74%, 81.51%], putting the current level in the 11th percentile.

Let's turn to the Skew Tab.



That Nov vol is a little misleading since it represents 2.5 trading days, but we can see how Dec and Jan'13 essentially lie right on top of each other. There really is no sign of a big event occurring today at all in the skew or term-stucure. So maybe this just isn't a big deal?...

Finally, let's turn to the Options Tab.



Across the top we can see the monthly vols are priced to 63.94%, 49.26% and 48.92 for Nov, Dec and Jan'13. I also note the vol changes on the day are -26.4, -2.8 and -2.8 vol points respectively for the same three expiries. So, the option market reflects less risk moving forward (the news is over -- the shares are out) and an implied in the 11th percentile, while the equity market reflects... a higher valuation...

I don't really know, but, should the implied really be near the bottom decile with the stock up double digit % on the day and shares outstanding doubling? What about systematic risk -- fiscal cliff?... No?...

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Western Digital (WDC) - Depressed Vol in "Fiscal Cliff" Fearing Environment

WDC is trading $35.00, up 0.8% with IV30™ down 3.5%. The LIVEVOL® Pro Summary is below.



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Western Digital Corporation (WD) is a provider of solutions for the collection, storage, management, protection and use of digital content, including audio and video. Its principal products are hard drives, which are devices that use one or more rotating magnetic disks (magnetic media) to store and allow access to data.

This is a quick vol note -- for those of you that are vega buyers, this could be an interesting one. I found WDC on a low vol custom scan. Let's start with Charts Tab (six months), 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 a pretty volatile ride with rather large ebbs and flows in the underlying price including a gap up on an earnings announcement in late Jul 2012. The 52 wk range in stock price is [$24.80, $45.65].

But it's the vol that caught my eye. I have included a vol chart for the last year, with just the IV30™, below.



It's easy to see here both how depressed the implied is right now and how high it has been over the last year. The 52 wk range in IV30™ is [32.15%, 63.40%], putting the current level in the 8th percentile (annual).

Let's quickly turn to the Skew Tab.



We can see a rather pretty skew shape for both Dec and Jan'13. I believe the next earnings release should be after Jan' expiry -- so we're looking at vol ex-earnings in this skew chart.

Finally, let's turn to the Options Tab.



Across the top we can see that Dec and Jan'13 are priced to 34.75% and 36.93%, respectively. I do note the rise in Apr vol which does have an earnings release embedded in it. In any case, I though this was a compelling low vol name to examine in a "fiscal cliff" fearing market.

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Diamond Foods (DMND) - Stock and Vol Pop on Pending Restatement; Enormous Upside Vol Diff Opens

DMND is trading $20.02, up 12.2% with IV30™ up 21.2%. The LIVEVOL® Pro Summary is below.



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Diamond Foods, Inc. (Diamond) is a packaged food company focused on building, acquiring and energizing brands. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. The Company sells its products to global, national, regional and independent grocery, drug and convenience store chains, as well as to mass merchandisers, club stores and other retail channels.

I found this stock using a real-time custom scan. This one hunts for calendar spreads between the second and third monthly expiries.

Custom Scan Details
Stock Price GTE $5
Sigma2 - Sigma3 > 10
IV30™ GTE 30
Average Option Volume GTE 1,200

The stock has earnings due out tomorrow, so front month elevated vol is expected – and that will spill into the second expiry. The news pushing the stock and vol today is that the earnings announcement tomorrow will also include the re-stated (read: corrected) results for the fiscal years 2010, 2011 and the first three quarters of 2012. This stock made the news when it found itself embroiled in a nasty accounting scandal with charges of bribery.

Source: San Francisco Business Times via Yahoo! Finance; Diamond Foods to release restated results on Nov. 14”, written by Mark Calvey.

Note that all of this was happening while the company was making acquisitions.

Let’s turn to the DMND Charts Tab (2-years), 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 cataclysm which was the accounting scandal. The stock fell from $92.47 on 9-20-2012 to now just over $20. Even more abrupt was the decline pattern itself – rather than a single day of catharsis and stock drop, it was several days of gaps down and new revelations making the prior day’s stories seem worse. It wasn’t pretty. The 52 wk range in stock price is [$16.15, $40.65], but of course, this is a two-year story (or longer).

The fact that DMND will be coming out with revised / restated financials is clearly seen as a positive to the stock price, but a risk elevator as well (read: vol is rising).

To get a better view of the vol, I’ve included the two-year IV30™ chart, below.



We can see how high the implied got during the accounting scandal, but what’s also interesting is the vol rise of late. A lot of that vol rise is the earnings announcement tomorrow – but a piece of it is the restated results coming out with it. The 52 wk range in IV30™ is [44.91%, 140%], putting the current level in the 46th percentile (annual).

But, this is a skew note – and the Skew Tab (below) is quite compelling.



I’ve excluded Nov (with earnings), and am focusing on months two and three. Most notable to me (and highlighted in the image above) is the massive vol diff that has opened up between the upside in Dec and Jan’13. While the ATM vol diff is ~10 vol points, the upside vol diff grows to well over 20 vol points. Some very wide markets in Jan’13 distort the image slightly, but the skew pattern is real. This is a fascinating vol discrepancy IMHO – one well worth examining.

Finally, let’s turn to the Options Tab.



Across the top we can see the monthly vols are priced to 233%, 89% and 79% for Nov, Dec and Jan’13. Of course, that Nov number is crazy high b/c of earnings due out while expiry is in three and a half trading days. Looking down the options montage and comparing Dec and Jan’13 upside, we can see that growing vol diff.

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McMoran Exploration (MMR) - Elevated Vol Pattern Persists, But Risk in Dec Keeps Rising

MMR is trading $12.72, down 2.1% with IV30™ down 5.6%. The LIVEVOL® Pro Summary is below.



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McMoRan Exploration Co. (McMoRan) is engaged in the exploration, development and production of oil and natural gas in the shallow waters (less than 500 feet of water) of the Gulf of Mexico and onshore in the Gulf Coast area of the United States.

This is an elevated vol note in a stock which as some peculiar vol patterns that I've discussed before. The implied has reached the level where it makes it a story again...

Let's start with the Charts Tab (one year), 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 a rather bumpy ride over the last year, though endpoint-to-endpoint the stock price change isn't that large. The 52 wk range in stock price is [$7.76, $16.57]. This one is all about the vol, though...

On the vol side we can see how elevated the implied is to both the short-term and long-term historical realized vol measures. In fact, that's just sort of the norm for this name - a vega sellers dream.

But, even more apparent is the recent vol spike. On 10-22-2012 the IV30™ was 61.70%. Today the implied is sitting at 115.87% or an 88% rise in less than a month. Note that the vol has risen during this period even though there was an earnings announcement on 10-19-2012 BMO. The 52 wk range in IV30™ is [58.69%, 122.80%], putting the current level in the 89th percentile.

Let's turn to the Skew Tab-- we'll get a window into when the risk is centered.



We can see how Nov ATM vol is well below the back two expiries. Even more noteworthy, we can see how elevated Dec vol is to Jan. Note hat the next earnings release should be near the week of Jan'13 expo -- so it might actually be in that expiry. The last two Jan earnings announcements were made on 1-18-11 and 1-17-12 and this Jan cycle expires on 1-18-2013. Tricky... even more telling is how elevated Dec is to Jan even with all of that " earnings stuff."

Finally, let's turn to the Options Tab.



Across the top we can see the monthly vols are priced to 70.37%, 115.47% and 101.78%, respectively for Nov, Dec and Jan'13. The risk is in Dec -- let's see what happens. Will the pattern continue -- a stock that shows an implied trading above the realized stock movement, or will the stock finally move abruptly enough to make owning vega the winner?

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VeriSign (VRSN) - Vol Remains in Explosion Territory... But is it High Enough and Is the Skew Shape Right?

VRSN is trading $41.70, down small with IV30™ up 1.9%. The LIVEVOL® Pro Summary is below.



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VeriSign, Inc. (VeriSign) is a provider of Internet infrastructure services. The Company provides domain name registry services and infrastructure assurance services. VeriSign segment includes Naming Services, which consists of Registry Services and Network Intelligence and Availability (NIA) Services.

This is a vol note, specifically elevated vol after an earnings move. Let's start with the Charts Tab (six months), 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 it's pretty easy to see the cataclysm that was the last earnings release. The stock dropped from $46.60 to $39.39 in a day, and then fell to $37.07 the following day. Here's a news snippet from that release:

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The big news was that regulators have delayed the review of VeriSign's contract for its domain name registry business. The review was expected to be completed by the end of next month by the Commerce Department, but VeriSign said regulators may not finish on time. That adds major uncertainty in the near-term for what some analysts had considered a "formality."

Source: The Motley Fool via Yahoo! Finance; Why VeriSign Shares Got Hammered, written by Evan Niu, CFA.
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Not only did the stock fall, but that news in fact raised risk (read: vol), and has catapulted VRSN's IV30™ to near annual highs. The 52 wk range in IV30™ is [18.77%, 50.63%], putting the current level in the 94th percentile.

The vol level though is even more impressive when we look at a year chart with IV30™ isolated. I have included that below.



This chart makes it so much easier to see how elevated and how abruptly the vol has moved on this news.  Let's turn to the Skew Tab, below.



We can see the monotonic increase in vol from the back to the front with a notable parabolic skew shape in the front reflecting both the potential for upside moves and downside moves. I am a bit surprised that Dec or Jan'13 (or both) don't reflect parabolic skew as well. It seems that while risk is certainly elevated, given the stock drop on the news, there is the potential for a stock rise as well... right?...

Finally, let's turn to the Options Tab.



Across the top we can see Nov, Dec and Jan'13 are priced to 52.46%, 48.84% and 45.90% vol, respectively. There are really two phenomena I note here:

1. The vol seem low given the news and the impending risk of the next announcement -- I mean, look at that stock reaction...

2. Again, the lack of upside skew in the back months is a little... confounding...

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International Game Technology (IGT) - Massive Upside Earnings Bets Roll In For Today’s Announcement; Vol Reaches Multi-year Highs

IGT is trading $12.66, down 1.8% with IV30™ exploding up 35.9%. The LIVEVOL® Pro Summary is below.



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International Game Technology (IGT)is a global gaming company specializing in the design, development, manufacture, and marketing of electronic gaming equipment and systems products, including online and mobile solutions.

The company has earnings due out today AMC but it caught my attention because of the high option volume (relative to average) scan – it’s the top result in the entire market – as well as the vol explosion.

Let’s turn to the Stats Tab and day’s biggest trades sections, below. We can see that IGT has traded nearly 18,000 contracts on a total daily average of just 1,345. Calls have traded on a 4.5:1 ratio to puts.





The action is in the front month 13 calls – and that’s really what caught my eye. We can see from the day’s biggest trades (above) that essentially every large trade today has been in those calls. The flow looks long to me based on circumstantial evidence of vol rising and the prices relative to the NBBO.

Let’s turn to the Options Tab.



I’ve highlighted the Nov 13 calls – check out that volume which is nearly 11,000 in the first four hours of trading in a stock that had a total existing OI of just 57,000 before today. We can also see the existing OI in that line is substantially smaller than the trade size – these are opening positions.

While the option volume is more than 1300% its daily average in the first four hours of the day, the stock volume is still below the daily average. If we extrapolate the stock volume from this point to the end of the day, it will be a heavy stock trading day, but maybe in 120%-130% higher than average level – nothing close to the 2000% range the option volume will likely see.

Let’s turn to the IGT Charts Tab below (one year). The top portion is the stock price the bottom is the vol (IV30™ - red).



On the stock side we can see some pretty poor performance over the last six months. But even more eye popping is the stock move off of the last earnings result in mid-July (circled in yellow). The stock dropped from $14.69 to $11.76 or a 20% drop in a day.

On the vol side we can see that the IV30™ hit 52.53% right before that earnings announcement and at the time, that was highest level IV30™ had reached in this time period we’re examining (note that I have circled that vol level).

Today, however, the vol is absolutely exploding, with IV30™ up 35%. The 52 wk range in IV30™ is [28.36%, 52.56%], so the level today is well into new annual high territory. In fact, the level today is a multi-year high.

I’ll skip the Skew Tab as the image isn’t needed – Nov is extremely elevated to Dec. In fact, we can look at the top of the Options Tab (above) and see that Nov vol is priced to 85.33% up nearly 30 vol points today, while Dec is priced to 48.77%, up 7.5 vol points.  One thing I do note, and it's a big one, the skew in the Nov 13 calls does not show a kink -- so there is no price discovery going on.  That might mean two-sided trading... just a "might."

Ultimately this is a fascinating stock today. Earnings are due out AMC and vol has exploded to a multi-year high while the OTM front month calls are trading size and the last earnings report saw a large gap in the stock price the next day. This is definitely one to watch.

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Morgan Stanley (MS) - Vol Spikes Higher, Stock Drops, but is Vol Too Low?

MS is trading $16.72, down 8.1% with IV30™ up 12.2%. The LIVEVOL® Pro Summary is below.



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Morgan Stanley is a global financial services company that, through its subsidiaries and affiliates, provides its products and services to a range of clients and customers, including corporations, governments, financial institutions and individuals.

This is a vol note on a stock that is reacting abruptly to the election (or something), and has a vol pattern developing that caught my eye, along with a vol diff between expiries.

Let's start with the Charts Tab (six months) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



We can see that the actual 6-month holding period return is pretty modest with the stock rising from $16.15  to now $16.78. More interesting is the initial drop and then rather abrupt recovery in MS since late summer. And then today happened... the 52 wk range in MS stock price is [$12.18, $20.99].

But this is a vol note. We can see the turn up in IV30™ today, but it's actually the longer-term annual trend that caught my eye. I've included the annual IV30™ chart below.



We can see two enormous spikes in IV30™ over the last year -- neither of which surrounded an earnings release (note the blue "E" icon denotes earnings dates). What really caught my eye is the pop in vol over the last few days. Yes, I know, there was some sort of election or something that happened yesterday, and the market is down size today (so VIX is popping), but how's this for a stat: on 10-22-2012 the IV30™ hit the bottom one percentile (annual) for MS. Since then, it has rocketed above the earnings vol level. The 52 wk range in IV30™ is [33.40%, 82.07%], which puts the current level in just the 19th percentile annual.

So what? I see a stock whose implied is rising rapidly after hitting essentially an annual low, yet even with the rise is still in the bottom quintile (compared to its own history) of annual vol.

The Skew Tab, below, shows us even more.



I have included the Nov09 weekly options in there for a complete picture. The notable phenomena here are:

1. There is a monotonic increase in vol from the back to the front.
2. The Nov monthly options (yellow curve) show a parabolic skew which reflects both upside risk (potential) and the normal downside risk.

Finally, let's turn to the Options Tab.



Across the top we can see the monthly vols are priced to 44.60% and 41.35% for Nov and Dec, respectively. Those Nov09 weeklies are priced to over 50% vol. It seems to me that there is some "settling in" that has to occur due to the election, but beyond that, there's some "settling in" that has to occur b/c we don't really have a good idea of which way the economy is going. It seems like the vol rise in MS makes sense, but the vol level... feels low, no?... Would you say the vol in MS right now should be in the bottom quintile (over the last year)? I dunno... feels weird(ish)... or not...

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Netflix (NFLX) - Vol Diff Opens; Skew Remains Parabolic

NFLX is trading $76.97, down 1.6% with IV30™ up 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. The Company’s subscribers can watch unlimited television shows and movies streamed over the Internet to their televisions, computers and mobile devices, and in the United States, subscribers can also receive digital versatile discs (DVDs) delivered to their homes.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.



The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. 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 front month vol simply because earnings are approaching.

Let's turn to the Skew Tab to illustrate the vol diff.



I note three phenomena here:

1. Most notably, the Nov monthly (yellow curve) options are priced well above he Dec (green curve) in terms of vol.
2. Both Nov monthlies and Dec show a parabolic skew shape -- reflecting both upside risk (potential) and downside risk greater than the ATM options.
3. Check out those Nov weekly options expiring on Friday. They have a ripping upside skew.


Now we can turn to the Charts Tab (six months), 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 finally see a six-month window where NFLX stock actually looks like it provided positive returns. Of course, the stock was also over $300 less than two years ago.

On the vol side I do note an interesting vol diff between the implied and the two historical realized vols. In English, the implied vol is trading below both the long-term and short-term historical realized movement of the stock. Hmm...

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



Across the top we can see the monthly vols are priced to 67.10% and 57.25% or Nov and Dec, respectively. An interesting position to examine would be one that is long the Dec upside, funded by a sale of Nov weekly upside. If that position works, then selling the Nov monthly upside again to fund that long Dec option. Since NFLX has weekly options, hypothetically the position could be walked up a few more times to the point where the Dec upside was entirely funded by front expiry sales. Ya know, or not...

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