Wednesday, July 21, 2010

Weyerhaeuser (WY) - August Option Buyer into Earnings and Elevated Vol

WY closed at $15.50, down 2.8% yesterday. The LIVEVOL™ Pro Summary is below.

Mike Bristow of Vtrader Group brought this one to my attention. Weyerhaeuser Timber Company is a forest products company. The Company is principally engaged in growing and harvesting timber; manufacturing, distributing and selling forest products, and developing real estate and constructing homes.

The company traded over 55,000 options on total daily average option volume of just 3,167 (note that the stats tab displays 75,000 which includes 20,000 cancelled contracts). The action was an Aug 14/17 strangle purchase and ~14,000 Aug 16 puts which may have been two sided paper. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates the action. We can see clearly how elevated WY vol is in August (72) compared to the back months (sep is 60 and Oct is 53) because of an earnings release due out on 7-30-2010 BMO.

The Aug 14/17 strangle buys this elevated vol ahead of a possible further increase in vol as earnings approach. The Aug 16 puts are dubious in terms of direction. They may be two sided, I can't really tell. However, the Skew Tab may provide some more color.

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

First, let's notice again, this time graphically, how elevated the Aug vol is to the other months (read: Red line is higher than the other lines). The Aug 17 line is kinked upward - that's from the buying pressure. The Aug line however looks essentially normal. That is, the skew should dip into the OTM calls. The fact that it is not also elevated leads me to believe the order flow was likely two sided (but again, I dunno).

With earnings coming up we look to see if WY is a big earnings mover - a strangle purchase might make sense then ahead of the earnings vol increase.

The top row is the stock price five trading days before earnings through five trading days after. The "E" icon represents earnings. The second row are the front two month ATM straddles for the same time horizon. You can see in fact that three of the last four earnings cycles the stock has moved less than the IV. So if anything, we could say WY is a sale of options into earnings, rather than a purchase.

Conclusion on this one: Maybe a strangle sale is in order before earnings, but small, just in case the order flow knows something. A straddle sale and buying the wings if they come down might also be another approach. Alternatively, if you like the order flow and think it's onto something, maybe 15/17 call spread looks better than a 17 call purchase naked.

This is trade analysis, not a recommendation.

Legal Stuff:

No comments:

Post a Comment