Tuesday, November 16, 2010

Harbin Electric (HRBN) - A Wild Story and Wild Vol

HRBN is trading $19.91, down 2.5% with IV30™ up 6.0%. The LIVEVOL™ Pro Summary is below.


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The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.  Just a heads up, this ain't your average time spread - this is a pretty crazy story.

Custom Scan Details
Stock Price >= $5
Sigma2 - Sigma3 >= 7
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 and <=50
Sigma2, Sigma3 >= 1

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 third months that are cheaper than the second month by at least 7 vol points. 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 selling elevated front month vol simply because earnings are approaching.

Looking to the Skew Tab (below), we can see the elevated vol in the second month (yellow line) relative to the third month (green line).

I've circled three strikes: 17.5, 20 and 22.5. Each are elevated in Dec to March. The company had earnings on 11-10-2010, so there shouldn't be any kind of earnings event in the Dec options, yet that vol is substantially elevated to March. Further, Dec can be a month of dead vol... when stocks wither to nowhere and short premium can collect a nice win to end the year. These factors sort of mitigate the fact that HRBN has some wide(ish) option markets to trade on.

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

So there's a lot goin' on here:
1. The IV30™ has exploded from ~30 to ~80 in ~8 weeks. Hello...

2. The stock gapped up from ~$20 to ~$25 on 10-8-2010.
News from AP: The head of China's Harbin Electric Inc. is teaming up with a private equity fund to try taking the company private.

The electric-motor manufacturer said Monday that CEO Tianfu Yang and Baring Private Equity Asia Group are offering stockholders $24 per share for the stake Yang doesn't already own.

Yang holds just over 31 percent of the company's stock. His bid amounts to a 20 percent premium over Harbin's closing share price Friday.

3. The stock gapped down from $24 back to $20 on 10-25-2010.
This was based on concerns over the company's operations and the buy-out itself.

4. After the flashy show in #2 and #3 above, the stock climbed into earnings on an upgrade, then lost all that momentum after earnings.

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

Potential Trades to Analyze
1. Start simple, though simple may not suffice:
Sell the Dec 20 straddle @ $3.25, buy the Mar 20 straddle for $5.40, so pay $2.15 in the time spread.

2. An alternative is to be long the juice. So, purchase the Mar 20 straddle for $5.40 and sell the Dec. 17.5/22.5 strangle @ $1.40, paying $4.00. The problem with this - if the stock moves hard, there is only $2.50 between the strikes, so that's "bad."

3. Skip the calendar, sell the Dec. 20 straddle @ $3.25, buy the Dec 17.5/22.5 strangle for $1.50. This receives $1.75 (MaxGain), with MaxLoss $0.75.

4. Slightly more adventurous than #3: same trade but sell the Dec. 12.5 puts @ $0.20. Naked short the downside, but collect more premium. This sells 115 vol... 115 vol!

5. Just sell the straddle in Dec and... pray for no takeover.  And if there is one, pray that the lawsuits haven't "inspired" the takeout price ove $24.

This is trade analysis, not a recommendation.

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