Tuesday, February 16, 2010

Valassis (VCI) - Unusual Vol (Straddle) Seller into Earnings

VCI is trading 25.67. Note that earnings are 2-22-2010 BMO. The LIVEVOL™ Pro Summary is below.

The company has traded over 10,800 options today in the first three hours on total daily average option volume of just 1,161. The largest trades have been the Mar 25 (ATM) straddles. ~9,000 of the contracts have been straddle sales. The Company Tab and Options Tab snapshots are included (click either image to enlarge).

The straddles were sold @3.80. The Options Tab snap (click to enlarge) shows that the puts are opening (small open interest) but the calls are not as clear. Note also the vol per month.

I looked up the opening trades on the Mar 25 calls - it seems that a bunch were part of some call spreads trading on 1-29-2010. The largest options trades for that day are included (click to enlarge).

It seems like the straddles today are opening based on the above. This trade feels weird to me:
(1) Earnings are coming soon after Feb. expo. but the Mar vol hasn't moved any higher than Jun. So a vol sale seems pre-mature.
(2) The Earnings & Dividends snap (click to enlarge) illustrates that in the Apr and Jul earnings cycles the vol as a backspread winner (purchase). In Oct cylce it was a sale. But I don't see a history of obvious vol sales.
(3) The Earnings & Div tab also shows that vol does creep up into earnings (as expected) especially in the last cycle - so why sell the straddle now?

I'm not saying this is a bad trade but I do think it's unusual - at least a little given the above. If the stock pins at $25 on March expo, 4500 straddes @ 3.80 turn into a $1.7 million winner. A Form 8-K was filed on 2-12-2010 with respect to some lawsuit - perhaps the cat was let out of the bag?

The Charts Tab snapshot (1 year) is included for completeness (click to enlarge). The bottom portion is the vol chart - red is IV30™, blue is HV20™.

This is trade analysis, not a recommendation.

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