Monday, March 14, 2011

UPDATE: Aflac (AFL) - Stock Dips, Vol Rises, But Order Flow is Backwards

UPDATE: This is an update to the article posted last Friday:
Aflac (AFL) - Puts Trade on Earthquake and Pro Order Flow Analysis

With unfortunate news coming out of Japan and the ambiguity in any definitive measure of the total damage, AFL is getting hit again.

AFL is trading $53.42, down 3.8% with IV30™ popping 14.5%. The LIVEVOL® Pro Summary is below.


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Today the company has traded over 12,000 contracts in the first three hours on total daily average option volume of just 5,074. Puts have traded on a 3.2:1 ratio to calls with the heaviest action in the Apr 50 puts -- but I believe these are substantially sales. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Apr 50 puts are mostly opening.  Again, the order flow looks like someone is offering them down.  So, selling in the face of a dipping stock and rising vol.

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

We can still see the elevated front month vol relative to the second. I've included the skew chart as of Friday below for comparative purposes.

If we look at the absolute levels (y-axis), we can see the substantial vol increase today off of the weekend's developments.

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 same recent pattern persists -- stock dipping hard as the vol spikes.

Possible Trades to Analyze
This goes straight to expectations. If you believe that the news from Japan will be market moving, then selling the front month vol is likely not the bet to make.

But, if you feel the market will stay here (ish), then selling the elevated vol may be worth examining.  Calendar spreads (Mar/Apr) are one way -- it seems like the order flow today has been simply selling the Apr vol.  That's a bet that things will not get worse and vol will dip as there's more vega in Apr options than Mar.

This is trade analysis, not a recommendation.

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