Monday, April 11, 2011

Tyco International (TYC) - Vol Up 65% on Takeover Rumor

TYC is trading $49.02, up 4.0% with IV30™ up 26.4%. The LIVEVOL® Pro Summary is below.


For a limited time we are offering a FREE real-time trial to Livevol Pro™ for non-professional traders. Click for Free Trial Offer

Tyco International Ltd. (Tyco) is a diversified company, which provides security products and services, fire protection and detection products and services, valves and controls, and other industrial products.

The news pushing the stock, and more notably, the vol, is included below:
Shares of Tyco International Ltd, parent of the ADT Worldwide security service, jumped 4.2 percent in early trading on Monday after a report that France's Schneider Electric (SCHN.PA) is weighing a bid for the industrial conglomerate.
Source: Tyco shares jump on report of bid by Schneider, written by Nick Zieminski; Editing by Derek Caney.

So there you have it -- a takeover rumor.

The company has traded over 10,000 contracts on total daily average option volume of just 2,260. Calls have traded on a 5.2:1 ratio to puts on this deal rumor. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. The largest volume seems to be in the May 50, 46 and 55 calls, respectively. The 50 calls look like purchases, the 46 calls are a bit ambiguous to me, and the 55 calls look like sales. Apr vol is up 15.5 points (~66%) while May vol is up 7.3 points (~21%). Note that earnings are due out in the May option cycle (that's just a projection). Vol rising generally points to option premium buyers.

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

We can see a marked upside skew in Apr. The Apr 50 calls are priced at over 40 vol and the 55 calls are priced at over 67 vol. When I remove Apr from the skew chart, we can actually see more clearly that the back months also have an upside skew that's bid. I've included the skew tab sans Apr, below.

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).

Obviously, the vol chart illustrates the rising vol today.

Possible Trades to Analyze
I find it interesting that TYC is only up 4.0% today (at least so far). The risk as reflected by the options market (vol) is rising much more than the expected value of the future entity worth (stock price). In English, there's risk that news is coming, but not a lot of belief in the stock price quite yet.

1. A speculative bet on higher stock price this week:
This is pure spec, but:
a. Apr 49/50 call spread for $0.35 yields just under 2:1 in a MaxGain:MaxLoss ratio and doesn't require the stock to move much more for breakeven (~$0.33).
b: Apr 50/55 call spread for $0.39 yields an 11.8:1 MaxGain:MaxLoss and sells ~25 points higher vol than it purchases, but does require TYC to go higher than $50 in the next trading week.

2. Calendar Spread:
This is risky b/c it gets long vega, and if a deal is announced, the back month vol will get crushed (and so will the calendar spread).
Apr/May 50 call spread for $1.25 (ish) -- this sells 7 points higher vol than it purchases. An added bonus here, the May cycle has earnings which at this point can be purchased for less (vol) than the non-earnings month. Of course, the earnings embedded vol takes a back seat to the vol (i.e. risk) of takeover news.

3. A bunch of similar stuff on the put side:
If there's just a continued rumor that persists for a few more trading days, spreading off those elevated vol puts in Apr with a spread (like a calendar) could be worth analyzing.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:

No comments:

Post a Comment