Monday, April 5, 2010

IGT - Skew Trade Forming?

IGT is trading 19.37 up 4.3% with IV30™ up 11.2%. The LIVEVOL™ Pro Summary is below.

The company has traded nearly 28,000 options in the first four hours on total daily average option volume of just 2,308. Calls have traded on a 29:1 ratio relative to puts. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates the Apr 19, 20 and May 21 calls are trading size - well over OI. In the case of Apr 19 and Apr 20 calls - nearly 8 and 10 times OI respectively. Note also now that April vol (39, up 5.3 points) is now higher than May vol (38 up 3.4 points) even though earnings are in the May cycle (a vol event).

The Skew Tab snap (click to enlarge) is a perfect illustration of what happens when one sided trades come into the market in one month in a short period of time.

The upside vol (skew) in April (red line) is spiking relative to the other months. Specifically look at the difference between Apr 20 calls and May 20 calls (highlighted in the chart). Also note one step further right - the May 21 calls are way below the Apr 21 calls - and in fact, someone has caught on... The third busiest line today is the May 21 call.

Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV60™ vs. the HV60™ vol difference.

You can see the stock has moved up recently (as has the entire market). You can also see that the stock has moved a bit after the last two earnings releases.

So the question is - if this is a bet that the stock will move up a lot in the near future whether by company fundamentals or a takeover - would you rather own higher Apr vol which expires before earnings or lower May vol which has earnings? Of course, the analysis ain't quite that easy, but it's an interesting phenomenon which develops quite often in options markets when one-sided order flow stays in just one month and price discovery takes time to eventuate.

This is trade analysis, not a recommendation.

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