Friday, November 19, 2010

VirnetX (VHC) - Elevated Vol for a Reason. Takin' on the Tech Giants

VHC is trading $12.69, down 5.7% with IV30™ up 1.6%. The LIVEVOL™ Pro Summary is below.


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I found this stock using a real-time custom scan. This one hunts for high vols. But, this one has high vol for a good reason.

Custom Scan Details
Stock Price >= $7 and <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 and <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated 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 selling elevated IV30™ simply because earnings are approaching. The VHC 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).


We can see:
IV30™: ~103.39
HV20™: 88.31
HV180™: 77.70

So, IV30™ is elevated relative to the short term and long term realized movement of the stock. Note that this stock has been ~$5 as of a few months ago and went as high as $20 less than two months ago. Hello?...

Here's some news from Motely Fool:
Nov. 10, 2010

The company posted a third-quarter report with the Securities and Exchange Commission on Monday night, but did not follow up with a press release. Today's massive price jump and yesterday's late-action drop of more than 16% are delayed reactions to this report as investors stumbled across new information outside the traditional news channels.

Now what: VirnetX landed a $200 million patent license payment from Microsoft (Nasdaq: MSFT) in the previous quarter, but booked no new revenue this time around, which explains the panicked drop. Today's bounce brings the stock back to a 652% gain over the past year, most of which came after that Microsoft payment. VirnetX has patent infringement lawsuits outstanding against Cisco Systems (Nasdaq: CSCO) and Apple (Nasdaq: AAPL) among other tech luminaries, and hopes to land another payday or two in the near future.

So this guy is a takeover candidate that has been a huge trading range, with patent issues, weird SEC filings, stocks pops and collapses, potentially no revenue or a lot, and is in the face of the A-list of tech stocks (AAPL, CSCO, MSFT). Umm, that would equal high vol.

The Skew Chart actually illustrates that the ATM vol is cheaper than the wings on both sides. The Skew Tab is included below. I have highlighted the ATM strike (13), though it's the 14 strike that has the lowest vol.

Let's finally look to the Options Tab (below).

Possible Trades to Analyze
1. Kinda Psycho:
Sell the Dec 13 straddle @ $2.80. This trade wins on Dec expo if VHC is in ($10.20, $15.80). That seems like a great trade - huge profit window, I mean other than the fact that stock has been as low as $5 and as high as $20... This trade can also be shut down earlier than Dec. expo if vol drops, or if the stock just sits and the trade wins to theta (time decay).

2. Not as psycho, but still under psychiatric evaluation:
Sell the Dec straddle @ $2.80, buy 3 Dec 15 calls for $0.70. That yields a $0.70 credit, wins huge to a takeover for $20.

3. Normal, sort of:
Sell the Dec 12/13 strangle @ $2.15.
Buy the Dec 9.5/14 strangle for $1.35.
This yields $0.80, has just $0.20 upside risk, but has a substantial downside risk. Let's look to the PnL chart for this one on Dec. expo.

4. Given what the Skew Tab showed us, you can approach this differently by purchasing the meat (ATM) and selling the wings (OTM). I can't even write that down in a number, it makes me ill. But that doesn't mean it's not a legitimate trade, I just can't get myself to buy that much premium.

Ultimately, with markets this wide and uncertainty this high, this might just be an interesting one to watch rather than one to trade... I'm just sayin'...

This is trade analysis, not a recommendation.

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