Tuesday, June 29, 2010

Comerica (CMA) - Fair Value Reporting Rules Coming; Rating Agency Claims Bearish for Banks

CMA is trading $37.13, down 3.8% with IV30™ up 15.5%. The LIVEVOL™ Pro Summary is below.

Comerica Incorporated (Comerica) is a financial services company. Comerica operates through three business segments: the Business Bank, the Retail Bank, and Wealth & Institutional Management.

Right now a proposal by the Financial Accounting Standards Board (FASB) would require banks to report loans and other financial instruments on its balance sheet at "fair value." (reference: Investopedia; Author: Eric Fox). You can read the whole article By Clicking Here. I'll summarize below.

This fair value thing, in my opinion, will continue to grow in importance and garner more headlines as the details are hammered out. Basically Fitch (the rating agency, eh hem) released a study that declared over $130 billion in market cap would have been lost by the twenty banks studied if the proposal had been put in effect in Q3 of '09. This represented ~ 14% of total cap.

So, in their eyes, this would take the financial sector - banks specifically, down pretty hard. Of course, an "efficient market" believer would say that the conclusion makes no sense given that the data is publicly available (to a great extent). I guess I just see it pretty simply. Banks do great things - without our banking system the US would not be what it is today. But...

... They're also Dirty Rotten Scoundrels (love that movie).

For this article, I'll just focus on one of the banks that this could effect, a smaller one - CMA.

First, the tick chart is included (click to enlarge).

We can see the front month vol (bottom chart) spiking as the stock tumbled (top chart).

The company has traded over 22,000 options on total daily average option volume of just 4,692. All but 607 contracts have been puts. The largest trade has been an Aug 32.5/37.5 put spread purchase 7,500x (i.e. 15,000 contracts). The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that the puts are opening (trade volume >> OI). Note also that earnings are projected for the start of the Aug cycle (though they may slip into July). The 5,000 July 40 puts are sales on 10,000 long OI (best I can tell). In other words, they're closing, while the put spread is opening.

Trade Stats
Buy 7,500 Aug 37.5 puts for $2.50
Sell 7,500 Aug 32.5 puts @ $0.80
Debit: $2.50 - $0.80 = $1.70
Total Cost: 7,500 * 100 *($1.70) = $1,275,000
Max Gain (Stock <= 32.5 at expo): $2,475,000

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month.

You can see a normal lookin' skew. July is pretty steep as there is a nickel bid in the 30 puts.

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.

The 52 wk. range for CMA is [$19.94, $45.84]. The spread bets on the stock going below $36 (ish). You can see the IV30™ is just now spiking past the HV20™.

This is trade analysis, not a recommendation.

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