Sunday, August 8, 2010

Fortress Investment (FIG) - Trading Long Term Vol Against the Trend

FIG closed at $4.20 on Friday, up 2.7%. The LIVEVOL™ Pro Summary is below.

The company traded over 38,000 options on total daily average option volume of just 1,464. Almost 37,000 of those contracts came in one three legged spread in the Jan '12 options. 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 action was opening (compare OI to trade size).

Trade Stats
Buy 12,000 Jan '12 2.5 calls for $2.20
Sell 12,000 Jan '12 5 calls at $0.75
Sell 12,000 Jan '12 5 puts at $1.50

There are a couple ways to look at this trade. One is to see it as a call spread purchase funded by put sales. You can also see it as a straddle sale to fund a deep call purchase. The first view looks bullish, the second makes it look like a hedge.

The largest share holder by far is Nomura Investment Managers with 60,000,000+ shares according to Yahoo! Finance. There are a few other major holders that could have used this a hedge (i.e. they hold enough shares).

I like looking at this trade with respect to a bet, rather than a hedge. The stock volume was 2.1 million on Friday vs. average of 1.7 million. I think this was done as a vol bet and maybe even with stock to hedge the delta.

The Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV360™ - pink vs HV360™ - orange). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

Note how much higher the long term HV is than the IV. Six months ago the difference was 158(hv) to 63(iv) or 95 points. As of Friday (six months later) it has steadily declined to 104(hv) to 59 (iv) or just 45 points. This Jan '12 trade could be a bet on a re-divergence. HV90™ is 69 vs. IV90™ of 54 (so HV > IV in this case as well).

While this could just be a stock hedge as mentioned above, it's also an interesting look into a possible long term vol bet the other way (i.e. away from a trend).

This is trade analysis, not a recommendation.

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