Friday, March 25, 2011

Eastman Kodak (EK) - $1B Trade Commission Decision Due out Today

EK is trading $3.46, up 10.5% with IV30™ ripping up 35.7%. The LIVEVOL™ Pro Summary is below.


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Eastman Kodak Company (Kodak) is engaged in the sale of imaging products, technology, solutions and services to consumers, businesses and professionals.

There is some big news possibly out today. Here's a snippet from Bloomberg:
Kodak Says $1 Billion at Stake in Apple, RIM Patent Dispute

A victory for Eastman Kodak Co. (EK) in its patent fight with Apple Inc. (AAPL) and Research in Motion Ltd. (RIMM) may add more than $1 billion in revenue from royalty payments, Chairman and Chief Executive Officer Antonio Perez said.

A decision is scheduled for about 5 p.m. Washington time today on whether the U.S. International Trade Commission will review a judge’s findings from January that Apple’s iPhone and RIM’s BlackBerry don’t violate Kodak’s patent on an image- preview feature in camera phones. Opening a review would revive Kodak’s effort to extract compensation from Apple and RIM.

Kodak used the ITC to gain $550 million from Samsung and $414 million from LG for allegedly infringing the same patent as in the Apple and RIM cases.

Source:Kodak Says $1 Billion at Stake in Apple, RIM Patent Dispute by Chris Burritt and Susan Decker

Very nice...

The decision has brought out the speculators and they're buying premium from what I see. The company has traded over 42,000 contracts in the first hour (ish) on total daily average option volume of just 12,383. Calls have traded on a nearly 6:1 ratio to puts. The stock itself has already traded more than 130% of its daily average volume. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. Apr 4 calls have traded ~9,700x, but on an existing OI of 9,338. My best guess is that the order flow today is purchases but that's against short interest. For what it's worth, as I'm writing this the volume on that line is now over 10,000. The OTM calls in May are also active.

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

We can see that in all of the front three months, the skew does bend upwards to the OTM calls. In English, the option market reflects two sided risk (the downside is also bent up). We can also see how much higher the vol is in the front month than the back months -- reflecting an expectation of a vol event (a decision) this cycle.

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).

The stock chart is pretty wild. Gaps up and down. Today the stock has a pop and the vol (bottom portion) is exploding. The abrupt move in the vol may reflect that the actual date of announcement may have been a surprise.

Possible Trades to Analyze
Yet another disclaimer here -- this is pure speculation. Just a fun analysis of some trades to examine. Also, note that there is always the possibility of unexpected delays which can crush the front month vol (and others) making all positions long vega/premium essentially dead.

1. Bet to the upside:
a. Buying the Apr 4.5/5 call spread for $0.04 yields a MaxGain:MaxLoss of 11.5:1. Of course, EK would have to explode up ~45% (and stay there to expo) to reach that level. Also note, just to reach the long strike, the stock would need to pop ~30%.

b. The May 4/4.5 call spread can be bought for ~$0.10. This yields a MaxGain:MaxLoss of 4:1, but only requires the stock move up 30% to reach maximum profit level (though it has to stay there or above) and only requires the stock move up ~16% to hit the long strike. Note that the Apr 4/4.5 call spread costs ~$0.09, so maybe just the extra $0.01 of premium makes May more attractive... or not...

c. Buying naked calls is also a possibility -- like the Apr 4 calls for $0.15 (or whatever).

2. Bet to the downside:
a. The May 3.5/4 put spread costs ~$0.37 but has all $0.50 in parity right now. I believe Apr costs about the same, so, ya know...

b. An interesting one I see is:
Buy the Apr 3 put for $0.13.
Sell the May 2.5 put @ $0.07.
Pay $0.06, but note the risk here is not just that EK doesn't go down. This trade is also short the back month, so a close is likely necessary on Apr expo even if the news gets delayed by a month.

3. High risky/naked bets:
a. Downside:
Buy the May 3.5 put for 0.45.
Sell 2 of the May 3 puts @ $0.20.
Pay a $0.05 for downside but risk a total stock collapse as this is naked short puts below $3. The nice thing here is that the stock can only go down to $0.

b. Upside:
Dare I mention a 1x2 (or 1 x 1 x 1 (selling 2)) here?... This is much riskier than #3a as there's hypothetically no ceiling to the upside.

4. Just watch the news play out -- it will be an interesting outcome either way.

This is trade analysis, not a recommendation.

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