Wednesday, October 27, 2010

Avon Products (AVP) - Wild Skew and Vol into Earnings with Takeover Rumors

AVP is trading $33.34, up 1.6% with IV30™ up 26.5% into earnings tomorrow before the open. The LIVEVOL™ Pro Summary is below.


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The company has traded 28,000 options in the first three hours on total daily average option volume of just 4,679. The action is in the front month calls, where over 25,000 have traded. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action and how it's really focused on the call side in Nov.

The Skew Tab snap (below) illustrates the vols by strike by month.

Now we have something here. Very interesting skew shape going into earnings. The front month is completely inverted, a positive slope to the upside, and a downside that has lower vol by strike. To read what skew is and why it exists you can go here: Understanding Option Skew.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock gapped up on 10-11-2010 on speculation of takeover... again... Since then the IV30™ has been ripping, well above HV20™ and HV180™. Today it has peaked, over 26% up or 52 vol.

We can look at the Skew the day before the rumors (below):

So, normal... And then, the day after the rumors (below):

Pretty cool. Since that day, the skew has pretty much remained inverted, bid to the upside. It has become even more pronounced with the vol and order flow today. This upside skew makes for some very tantalizing trades, but ones that leave upside naked. Just a random example, the Nov 39/40 1x2 call spread can be done @ $0.25 credit. Whoa... A $0.25 credit for a call spread more than 20% OTM. Crazy... But, you know, the vols are priced like that for a reason...

It would be a neat little trick to announce a takeover with an earnings release.

This is trade analysis, not a recommendation.

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