Wednesday, January 27, 2010

Toyota (TM) - Effects on Vol and Skew of News

TM is trading 80.52 down more than $6. The IV30™ is up 21%. The LIVEVOL™ Pro Summary is below.

The news, of course, is this:

From Seeking Alpha (a great newsletter fyi)
In an unprecedented move, Toyota (TM) has halted U.S. production and sales of eight models, including its top-selling Camry and Corolla models, on mounting concerns that defects might cause the cars to accelerate unintentionally. The eight models represented 57% of Toyota's 2009 sales. A Toyota spokesman didn't specify how long the sales suspension will last, but the move will no doubt be costly both in terms of lost revenue and damage to a once-strong reputation for safety.

The company has traded over 6,000 options today in the first 45 minutes on total daily average option volume of 981. The Company Tab snapshot is below (click the image to enlarge).

The Option Tab snapshot is inlcuded below (click the image to enlarge).

You can see the downside puts are trading on greater volume than open interest (OI) - these are opening trades. These trades are pushing up the volatility on those strikes and therefore bending the skew relative to normal. The skew chart for today and as of 11/20/2009 are included below (click either image to enlarge).

Skew legend:
Red - Front Month
Yellow - Second Month
Green - Third Month
Light Blue - Fourth Month
Dark Blue - Fifth Month
Purple - Sixth Month

Note that on 11/20/2009 the months stacked on top of each other pretty well. The downside skew was "normal shaped" with a slight upward turn to the downside. To read details about why option skew exists the reader is directed to the blog "Understanding Option Skew" available by clicking HERE.

The skew chart as of today shows a distinct separation of the months on the downside - with the front month (red) considerably higher than the other months. This indicates higher perceived risk in the short term - read "uncertainty".

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