Thursday, December 9, 2010

Ivanhoe Mines (IVN) - Stock Drop, Takeover Offer and Elevated Vol

IVN is trading $25.48, up 2.0% with IV30™ up 1.1%. The LIVEVOL™ Pro Summary is below.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months. The stock gapped down over $4 of couple of days ago and is up for sale; more on that below.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 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 back months that are cheaper than the front by at least 8 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.

The steep decline in shares of Ivanhoe Mines(IVN) on Wednesday can be divided into two separate investor concerns: first, an immediate and negative take on valuation, and second, a sense that the speculative mining play is losing longer-term leverage to sell itself on the best terms.

Ivanhoe Mines announced concurrent to a new deal with Rio Tinto(RIO) to fund its Mongolian copper and gold project, Oyu Tolgoi, that Ivanhoe will be issuing $1.2 billion in shares. Ivanhoe also provided a capex forecast that was much higher than the company's previous capex plan.

Ivanhoe Mines shares were down 13% near midday, and trading of 7 million shares was well above the less than 2 million average trading volume for the speculative mining play.

The knee-jerk reasons for the selloff were the valuation call on the mining company's stock as a result of the dilution to come from the rights issuance, and the negative surprise on capex.
Source: TheStreet, written by Eric Rosenbaum.

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).

I've highlighted the large stock move down and contemporaneous HV20™ pop.

More news came after the stock drop regarding a takeover. That news is below:
Ivanhoe Mines (IVN) is expected to try to sell itself, sources said, and will likely employ a two-step process in which the company first sells or spins off all its assets except its stake in the Oyu Tolgoi copper-gold mine.

After disposing of its other assets, Ivanhoe would then seek a buyer for the part of the company not owned by Rio Tinto (RIO), its largest shareholder. Rio would have the opportunity to make an offer if Ivanhoe moves forward on selling itself, and BHP Billiton (BHP), Xstrata (XSRAF.PK) and Anglo American (AAUKY.PK) might also be interested in the copper mine stake.

Source: Seeking Alpha, written by Rachael Granby.


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

We can see how the front month is elevated to the back. I've highlighted the 27 line, as that vol diff looks the largest (about 13 vol points).

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

Potential Trades to Analyze
1. Sell the Dec 27 call @ $0.35.
Buy the Jan 27 calls for $1.20.
Net debit of $0.85, selling ~ 63 vol and purchasing ~ 54 vol. This is a bet that IVN upside moves come after Dec expo.

2. Sell the Dec 25 straddle @ $1.80 (~60 vol).
Buy the Jan 25 straddle for $3.75 (~53 vol).
Net debit of $1.95. I dunno, not in love with this one for some reason.

3. Riskier Trade:
Sell the Dec 27 call @ $0.35.
Buy the Jan 27 calls for $1.20.
Sell the Jan 29 calls @ $0.60.
Pay $0.25 for what will hopefully turn into a Jan 27/29 call spread. Worst case, a takeover blows this position up over $29 pre Dec. expo.

4. Riskiest Trade:
Do #3, and sell the Jan 22.5 put @ $0.65. Net this position collects $0.40, and is naked the downside throughout, and the upside until Dec expo. A purchase of the Dec 23 puts for $0.20 protects the downside until Dec expo.

This is trade analysis, not a recommendation.

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