Wednesday, May 5, 2010

*UPDATE: Quest Diagnostics (DGX) - Skew Rips Higher (Takeover Rumors)

Original Post: Click Here

DGX is trading 56.60, with IV30™ up another 13.2%. The LIVEVOL™ Pro Summary is below.

I originally posted about this stock two days ago (Monday 5-3-2010). Michael Kenny (a blog reader) noticed the ridiculous upside skew forming, particularly in the May 65 calls. Well, not to beat a dead horse but... Ok, I'll beat the dead horse.

The stock is trading the lower, two fewer days remain in the month and still no news, but... The may 65 calls are trading even higher - actually, a lot higher. The Options Tab (click to enlarge) is included.

If we look at the quotes by exchange (called Level 2) we can see the bid is small and in one exchange (CBOE).

The $0.40 bid for 70 comes up, then goes away, then comes back, etc, etc. This is exactly what happened with $0.25 bid two days ago.

The Skew Tab snap for today is included - it basically looks like the one from Monday, but vols are even higher.

The front month vol on Monday was 31; today it's 40. The May 65 calls were 45 vol, today they are 56. I'm just sort of watching this thing and wondering.. What the hell is going on?

Some astute readers/traders got the May 60-65-70 butterfly off for great prices - anywhere from free to $0.10. With a $5 max gain, paying $0.10 or less is pretty damn good. That trade worked out so well b/c the 65 calls were so expensive relative to the 60 and 70 calls (so selling two 65 calls and buying one of each of the cheaper vols was a great trade). The 60 calls are still "cheap" at only 42 vol, but now the 70 calls are 65 vol. Wow...

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 IV30™ vs. the HV20™ vol difference.

You can see the stock dipping recently. This feels like a takeover bet. I don't have any idea if it's going to happen, but I can't really see anything else pushing the stock above $65 in 16 days considering earnings are already out - and the reaction was negative.

This is trade analysis, not a recommendation.

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