Thursday, March 24, 2011

Liz Claiborne (LIZ) - Multi-day OTM Call Buyers Ahead of Earnings

LIZ is trading $5.35, up 1.7% with IV30™ up 6.2%. The LIVEVOL® Pro Summary is below.


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Liz Claiborne, Inc., incorporated in January 1976, designs and markets a global portfolio of retail-based brands, including JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX.

I've noticed now for the second day, large call accumulators in the May 6 line. With LIZ earnings due out in early May, I felt this was now worth a note.

The company has traded over 13,000 contracts on total daily average option volume of just 1,687. Calls have traded on an 8:1 ratio to puts. The largest trade was a 4,000 lot bought of May 6 calls for $0.375 tied to $5.37 stock on a 37 delta. Color provided by stud broker Mike Bristow of the V-trader Group. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the calls in May show a very large OI. On 3-21-2011 the OI jumped from 0 to 10,083. The calls traded for $0.30 on a 0.20 x 0.30 market -- they look like purchases. Today, the largest order was purchases a again.

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

We can see the May 6 line is bid up from the order flow. May in general has elevated vol to the other months (Apr and Jul) due to earnings. In addition, the Apr 6 and Jul 6 lines are bid up -- so the order flow has had an impact on the skew throughout the term structure.

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).

Note that the IV30™ has popped of late as the stock has stood still. Also note that this used to be a ~$7.50 stock until a collapse of sorts in early Jan. On 1-6-2011, the news from AP read:
Apparel maker Liz Claiborne Inc. on Thursday cut its outlook for the fourth quarter and second half of 2010, sending shares down sharply.
In aftermarket trading, Liz Claiborne shares sank $1.34, or 19.4 percent, to $5.56. The stock closed the regular Thursday session down 16 cents, or 2.3 percent, at $6.90.
Source: AP

Possible Trades to Analyze
1. Call spread in May:
The May 6 buying has pushed that lines' vol above the ATM, so a spread that purchases the ATM and sells the slightly elevated vol is worth examining.
Buy the May 5/6 call spread for $0.40.
Note that there is $0.35 of parity in this trade already.

2. Calendar spread Apr/May:
Although the vol is elevated in May (earnings), a calendar that sells the cheaper Apr in order to own the more expensive May does still sell some elevated upside skew in Apr.
Buy the Apr/May 6 call spread for $0.25.
The key here is to get the $0.15 sale off in Apr -- otherwise, this starts to look less attractive.

3. Risky Trade:
A risky trade is sitting on the board here where both of the elevated skews can be sold (both months).
Sell 1 Apr 6 call @ $0.15.
Buy the May 5/6 call spread for $0.40.
This is a net debit of $0.25 but risks MORE THAN THE DEBIT. This trade is naked upside above $6 (and starts to lose above $6.75). If a takeover comes around (or anything that really pops the stock), this could be a big loser.

This is trade analysis, not a recommendation.

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