Tuesday, March 22, 2011

Harbin Electric (HRBN) - Elevated Vol, Calendar and Takeover

HRBN is trading $17.76, up 3.1% with IV30™ down 3.9%. The LIVEVOL™ Pro Summary is below.


For a limited time we are offering a FREE real-time trial to Livevol Pro™ for non-professional traders. Click for Free Trial Offer

Harbin Electric, Inc. (Harbin Electric) is a holding company. It designs, develops, manufactures, supplies and services a range of electric motors, including linear motors, specialty micro-motors and industrial rotary motors. It sells its products in China, but also to certain international markets.

I wrote about this company on 11-16-2010. You can read that post here:
Harbin Electric (HRBN) - A Wild Story and Wild Vol

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the second and third months. There is an additional twist here with an earnings date.

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

Having said that, this time I want to examine the vol difference between the first and third months.

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

HRBN just released earnings on 3-16-2011, so that volatility event is out of the way. I see in some places that the next projected earnings are due out in May (which is odd as that's just two months). I'm not totally convinced, but Jun is likely to have another earnings release (though also not guaranteed). So what we have here is a front month vol after earnings that is more expensive than an earnings month. Hmm...

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).

Most notable here is the giant drop stock pop on 10-11-2010 up to a high of $25.05. The news was:
HRBN said Chairman and Chief Executive Tianfu Yang and a fund advised by Baring Private Equity Asia Group Ltd. proposed to buy the shares of the company they don't already own for $24 each.
Source: MarketWatch, by Robert Daniel

Then, in mid Nov 2010, the stock dropped all the way down to a low below $15. On the vol side, we can see IV30™ peaked over 100 and while still elevated, has dropped off of earnings down to the mid 80's.

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

Potential Trades to Analyze
1. Calendar spread Apr and Jun.
Sell the Apr 17.50 straddle @ $3.00 (ish) or ~ 80 vol.
Buy the Jun 17.5 straddle for $5.30 (ish) or ~ 77 vol.
Pay $2.30 to own Jun against Apr. Some notes here:
a. This trade is long vega, so if this elevated vol collapses, the trade could stand a large loss.
b. If the stock moves back to the "takeover" price in Apr, this trade loses.

2. Calendar spread Apr and May.
Sell the Apr 17.50 straddle @ $3.00 (ish) or ~ 80 vol.
Buy the May 17.5 straddle for $4.70 (ish) or ~ 80 vol.
Pay $1.70 to own May against Apr. The risk here is similar to the one above with the obvious change in the month being bought.

3. Totally different:
If the vol in this stock should be elevated given the surrounding uncertainty, maybe buying the Apr straddle now that the vol has come down a bit after earnings, is worth examining.

This is trade analysis, not a recommendation.

Legal Stuff:

No comments:

Post a Comment