Tuesday, September 28, 2010

Network Appliance (NTAP) - Elevated Vol with a Twist in Takeover Name

NTAP is trading $50.72, up 2.7% with IV30™ up 4.7%. The LIVEVOL™ Pro Summary is below.

I found NTAP on the elevated vol custom scan.

Custom Scan Details
Stock Price >=5
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >= 10 <= 60

Let's first look to the Charts Tab (6 months). The top portion is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference (click to enlarge).

We can see short term implied is ~52 while short term realized is 34 ad long term (trend) realized is 40. With earnings outside of the Oct cycle, this vol feels elevated, but with a twist discussed below. The IV30™ 52 wk. range for NTAP is [26.78,54.75], so we're at elevated levels.

Let's look to the Skew Tab, where we can see vol by strike by month (click to enlarge).

Note that Oct (red) is substantially bid to the upside. In English, there is higher risk of a large upward move than downward as reflected by the options market. Why?... Because of takeover fever. NTAP is in the same space as PAR, NZ and other takeovers.

Let's look to the Options Tab, and figure out some potential trades to analyze (click to enlarge).

Possible Trades to Analyze
1. Selling the ATM straddle @ $4.50 feels juicy, but super risky due to takeover risk.

2. Selling puts sells vol but is a naked delta bet as well.

3. Selling the Oct 50 straddle @ $4.50 and buying 1 Oct 55 call with 1 Oct 60 call yields a $3.20 credit and probably still wins to a takeover as long as the price is over $61.80. There is a dead zone between $53.20 and $61.80. The real risk is the naked downside. Assuming no takeover, this strategy wins if NTAP is in ($46.80, $53.20) at Oct expo. If a sort of "floor" forms in the takeover names, this strategy could work. The PnL chart for this strategy is included (click to enlarge).

This is trade analysis, not a recommendation.

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