Wednesday, March 9, 2011

SRA International (SRX) - Calls Trade on Pending Takeover Decision

SRX is trading $26.75, up 2.7% with IV30™ up 4.9%. The LIVEVOL® Pro Summary is below.


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SRA International, Inc. (SRA) is a provider of technology and consulting services and solutions primarily to government organizations.

Really interesting news here:
NEW YORK, Feb 22 (Reuters) - The auction for U.S. defense consulting company SRA International (SRX.N) has advanced to the final round, but there remain lingering doubts that the firm's influential founder will eventually be a seller.

At least four private equity firms -- Providence Equity, General Atlantic, Kohlberg Kravis Roberts & Co (KKR.N) and Veritas Capital -- have held discussions about buying SRA after the company hired Houlihan Lokey to advise on a potential sale, several people familiar with the matter said.

SRA set a mid-February deadline for final offers although it could take several more weeks for any deal to emerge, two of these people said. It could not be immediately learned if all of the buyout firms had submitted bids.
Source: DEALTALK-SRA auction doubts linger in final round, By Soyoung Kim and Nadia Damouni.

The company has traded over 16,000 contracts in the first 45 minutes on total daily average option volume of just 878. Calls have traded on an 11:1 ratio to puts. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. My best guess to order flow is this:
Mar 30 calls: Sales
Apr 30 calls: Purchases
Apr 35 calls: Sales
Jun 30 calls: Purchases
Jun 35 calls: Sales

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

We can see the elevated vol in the front two months while Jun is substantially lower -- the options market reflects news out before Jun. The parabolic (ish) skew in the front two months reflects upside and downside risk that are equal (ish).

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 most obvious thing I see is the elevated IV30™ (for good reason). It's interesting that on the last earnings a few weeks ago, the stock did pop over $30 momentarily.

Possible Trades to Analyze
The average of the Apr 25 and 30 straddles (27.5 straddle) is ~ $5.30. Although the vol is elevated (Charts Tab), you could make an argument that the straddle will move more than that if the news that comes out is definitive.

1. Buy "expensive" vol:
Buy the Apr 25/30 strangle for $2.90 to bet on a big stock move.
Of course, you could also make an argument to sell "expensive" vol. I know, that's not a lot of help...

2. Cheap bet to the upside:
Buy the Apr 35/40 call spread for $0.25 and sell higher vol than you purchase in a call spread.

3. Bet to the downside:
Buy the Apr 22.5/25 put spread for $0.85. This creates a 1.6:1 MaxGain:MaxLoss ratio.

This is trade analysis, not a recommendation.

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