Tuesday, February 8, 2011

Bank of New York Mellon (BK) - Vol Pops on Dividend Spec

BK is trading $32.24, up 1.3% with IV30™ popping up 6.0%. The LIVEVOL® Pro Summary is below.


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Here's what I believe to be the relevant news:
While these banks have talked openly about increasing their dividends for several weeks if not months, the timetable suggested by the report is sooner than many bank stock watched have expected and "would be viewed favorably by the market," the report states.
RBC's analysts argue dividend increases "should approach 30% of current earnings."
Source: Bank Dividends May Come Early: Analysts
By Dan Freed

The company has traded just over 15,000 contracts on total daily average option volume of just 4,786. Calls have traded on a 37.5:1 ratio to puts with over 10,000 Mar 31 calls changing hands. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Mar 31 calls are mostly opening (compare OI to trade size). I do think most of these are purchases, but there is some two-sided trading in my opinion. I also note the 8,527 OI in the Mar 30 calls - it looks like short interest, which makes sense if it's in anticipation of a large divi.

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

What's odd here, or sort of odd, is that the ATM vols rise each month. There's no rule that back months should be cheaper than front but it's not common. The skew is more pronounced in the front month, which is in fact very "normal." Very normal?...

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).

IV30™: 24.44
HV20™: 24.79
HV180™: 26.40

The one thing that I note here is that the IV30™ is in fact lower than both the short-term historical realized vol (HV20™) and the long-term realized vol (HV180™). Since the vol is higher in the back months than the front, and the vol is increasing, it feels like maybe this worth some analysis.

Possible Trades to Analyze
1. Buy some Mar vol:
Buy the Mar 32 straddle for $2.40

2. Do a calendar:
The options market reflects slightly elevated risk in Mar to Feb, but maybe the news really is out in Mar, so selling Feb to fund it could be worth a look.
Sell the Feb 32 straddle @ $1.03
Buy the Mar 32 straddle for $2.40
I gotta say, that Feb straddle does seem kinda cheap, though.

3. Buy some Feb vol:
Buy the Feb 32 straddle for $1.05. This purchases ~25 vol.

This is trade analysis, not a recommendation.

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