Friday, October 8, 2010

M&T Bank (MTB) - Low Vol into Earnings

MTB is trading $77.18, up 0.4% with IV30™ down 7.9%. The LIVEVOL™ Pro Summary is below.


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News: (Click for Reference)
A “diverse group of institutional investors” has purchased Allied Irish Banks PLC’s entire 22.49 percent stake in M&T Bank Corp.

An Oct. 7 memo from M&T chairman and CEO Robert Wilmers to M&T employees states that AIB’s stake was placed with investors in less than 24 hours. The 10 largest buyers, on average, purchased less than 1 percent of the outstanding stock through AIB’s public offering, according to Wilmers’ note

I found this stock using a real-time custom scan. This one hunts for low vols.

Custom Scan Details
Stock Price <= $7 IV30™ - HV20™ <=-8 >= -40
HV180™ - IV30™ >=7
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >= 32

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.

The goal with this scan is to identify short-term implied vol (IV30™) that is depressed both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not purchasing depressed IV30™ relative to HV20™ simply because of a large earnings move.

Looking to the MTB Skew Tab (below) we can see that Oct (red) is above Nov(yellow) and Nov has an earnings cycle (a vol event).

The MTB Charts Tab is included (below). The top portion is the stock price, the bottom 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.

We can see:
IV30™: ~29.22
HV20™: 41.45
HV180™: 37

So, IV30™ is depressed relative to the short term and long term realized movement of the stock. Last earnings cycle MTB front month vol got as high as 40.87 the day before and two cycles before vol rose to over 34.

Finally, let's look to the Options Tab (below).

Possible Trades to Analyze
1. This was a scan to find vol to purchase so, buying the Nov75/80 strangle for $4.10 is a naked vol purchase trade.

2. #1 with a sale of the elevated vol in Oct drops the total debit by ~$0.90 but does risk MTB moving outside of the 75/80 strikes in the next week.

3. #2 looks even better if it works out, then selling the 70/85 strangle in Nov after Oct expo in terms of lessening the total debit.

4. Combining the above with offset strikes and perhaps doing some ratios also lead to some interesting PnL bets.

This is trade analysis, not a recommendation.

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