Thursday, March 17, 2011

SRA International (SRX) - Vol Still Rising in Ambiguous Deal Stock

SRX is trading $26.73, down 0.3% with IV30™ up 0.7%. The LIVEVOL™ Pro Summary is below.


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I wrote about this stock on 3-9-2011:
SRA International (SRX) - Calls Trade on Pending Takeover Decision

With the vol still rising, I think it's worth another visit.

This one is news heavy:
NEW YORK, March 9 (Reuters) - At least three private equity firms remain interested in SRA International Inc (SRX.N) as the U.S. defense consulting company seeks another set of buyout offers this month, people familiar with the matter said.

Providence Equity, Veritas Capital and General Atlantic remain interested in buying SRA, three people said, adding that the process is ongoing despite lingering doubts about whether Founder and Chief Executive Ernst Volgenau will eventually be a seller.
Source: At least 3 PE firms seen still interested in SRA.

Basically, there seems to be interest from several firms to take the company over/buy it out but the fly in the ointment is the founder who may be unwilling to sell his substantial stake.

Let's start with the Charts Tab (6 months). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

I've highlighted a few things:
1. A couple of stock pops.
2. The IV30™ is rising while the stock has been stuck in "I dunno what's going to happen" land for the last few weeks.

The excitement on 3-9-2011 was echoed with some pretty large order flow. The historical snapshot (from the Charts Tab -- click on the day you want at the bottom on a volume bar) is included below.

We can see the IV30™ rose 4.8% that day, and it's already ~10% higher today from that level. The largest orders were some 30/35 call spreads in Apr and Jun along with a ton of volume in the Mar 30 calls.

The OI in the Mar 30 calls was 5,833, then 6,444 calls traded and the next day the OI jumped to 9,056. So the trades were substantially opening. Looking to the Options Tab we can see the current OI and the vol by month (at the top).

Note that Apr vol is 79 while Jun is ~54 and Sep is ~45. The options market reflects substantial near-term risk (and thus the rising IV30™).

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

It is odd to me that the upside skew isn't bid (it was on 3-9-2011) -- i.e. the skew now bends down to the OTM calls which is normal, but the news isn't normal for this stock. The elevated vol (risk) has not changed the skew shape so the naked upside buyers aren't really out there, or they aren't forcing market makers to raise the OTM calls more than other strikes.

Possible Trades to Analyze
This one offers a bunch of trades to analyze.

1. A calendar spread between months two and three is on the board. Note that Jun has an earnings release and is still quite depressed relative to Apr.

2. A vol sale of some sort in Apr with covered wings (since the skew hasn't pushed OTM vol too high).

3. Just sit and watch. This is an interesting one. It feels like the downside is more risky relative to the upside. Of course, with vol up more than 100%, they're both quite risky.

This is trade analysis, not a recommendation.

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