Monday, August 2, 2010

Omnicare (OCR) - Vol Spikes 40% on CEO News; Earnings Due in 3 Days

OCR is trading $23.40, down 5% with IV30™ up nearly 40% today. The LIVEVOL™ Pro Summary is below.

OCR announced today that Joel F. Gemunder, President and Chief Executive Officer, has informed the Board of Directors of his decision to retire, effective July 31, 2010. Mr. Gemunder, age 71, has been President of the Company since May 1981 and Chief Executive Officer of the Company since May 2001.

The company has traded over 10,000 options in the first two hours on total daily average option volume of just 271. Trading has been in both the calls and puts on the news. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The news sounds pretty "normal" in the sense that it sounds like a reasonable retirement (not just out of nowhere to dodge a blowup). For the long run this could have a substantive impact on the company, but for the near term, I think this vol could be a sale. The company reports earnings on 8-5-2010, so the vol is exploding on both that and the news.

The Options Tab (click to enlarge) illustrates the front month prices and vols.

For a risky trade I think a 22.5/25 strangle sale looks pretty juicy. A $0.95 sale of the 22.5 puts with a $0.60 sale in the 25 calls yields $1.55 on a $23.50 stock. Granted, the stock has moved $1.15 (ish) just today. Waiting until the day of earnings to make sure there isn't any further stock slippage may be a safer bet as the stock can clearly swing.

Other trades could be a sale of the Aug 20 puts @0.35; I might even like that better than the strangle. If you like the strangle sale, you can cover up buy purchasing the Aug 27.5 calls for $0.15 and the Aug 17.5 puts for $0.15. This is sort of, "disaster" insurance. Again, waiting to do anything right before earnings may be safer.

Either way, I would close these trades after earnings in a few days.

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

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 main point here is the vol explosion in the bottom chart. This is a risky trade that looks to expose the vol increase as overdone in the very short term. Tread lightly.

This is trade analysis, not a recommendation.

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