Friday, April 1, 2011

Avalon rare Metals (AVL) - Fascinating Order Flow into Earnings

AVL is trading $8.41, up 4.0% with IV30™ up 11.6%. The LIVEVOL® Pro Summary is below.


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Avalon Rare Metals Inc. (Avalon) is a Canada-based mineral exploration and development company. The Company’s primary focus is on rare metals and minerals, including tin, lithium, tantalum, niobium, cesium, indium, gallium, zirconium and calcium feldspar.

This is a little guy. I called IR and spoke with a lovely lady. Apparently they don't even release earnings through the press -- the just file the requisite docs with the SEC/Edgar and then a few days later post it on the website. Their next financials are due out just around Apr expo (~Apr 16). Check out this order flow in both options and stock.

The company has traded ~6,500 contracts in the first 1,5 hours on total daily average option volume of just 1,822. All but 254 contracts have been calls, yielding a 24.7:1 call:put ratio. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. Over 3,500 Apr 9 calls have traded -- they look like purchases to me. The existing OI of 2,707 has been accumulated over the last couple of days from ~800, to now over 2,700, and soon to be in the ~6,000 range (if it's all the same side). The other action is in the May 10 calls where 724 contracts have traded on 0 (zero) OI. Those trades look to be buyer initiated as well also (just an educated guess).

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

We can see the front month vol is well elevated above the second month reflecting some sort of volatility event (likely the earnings filing) in the Apr cycle. Also, check out the vol difference between the Apr and May upsides -- the skew in Apr is bid to the upside while May is bumpy but flat. The Apr 10 line is bid likely b/c of the order flow. Price discovery doesn't feel complete in the skew -- it should (or could) even out. Interesting...

Finally, the Charts Tab (less than 3 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

There's not a lot of history here, so take from it what you will.

Possible Trades to Analyze
The stock volume is already nearly 180% of the average. There is a possibility that the call buyers are selling stock, which is just turning a call into a put. If that's the case, then the trades are likely hedges (or bearish). But... the stock is up on high volume, so it doesn't feel like stock sellers are outpacing buyers at all.

1. Trade the Apr/May upside skew
a. The Apr/May 10 call spread for $0.30 sells ~ 15 vol points higher than it purchases.

b. Something similar, but also bet with deltas:
The Apr/May 10/9 call spread for $0.50 sells ~90 vol, purchases ~77 vol and gets long deltas as well. If there's a stock pop well through the strikes, the long deltas yield a profit.

2. Beyond trades, it's just fun to watch this one.

DISCLOSURE: As of ~12:30pm EST I bought some calls very small in Apr. 

This is trade analysis, not a recommendation.

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