Monday, May 16, 2011

Forest Labs (FRX) - Vol, Skew and Calendars

FRX is trading $34.57, up 1.0 with IV30™ popping up 13.7%. The LIVEVOL® Pro Summary is below.


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Forest Laboratories, Inc. (Forest) and its subsidiaries develop, manufacture and sell branded forms of ethical drug products.

On a side note, regarding the description: I guess the alternative is unethical drug products?  Just sayin'...

The company has traded just under 12,000 contracts on total daily average option volume of 2,219. The largest trade was a purchase of 2,500 Jun 35 calls for $1.30 on AMEX. Over 7,300 of the Jun 35 kind have traded today. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Jun 35 calls are mostly opening (compare OI to trade size). When looking down the entire option chain for FRX, I don't see any OI larger than 2,200 until we get to the Jan '12 options -- so the trading volume today is quite substantial.

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

This is great skew. The order flow in the second month has the upside bid. But the order flow also has the front month upside bid. I've highlighted the 35 strike -- it's interesting (but reasonable) that the May and Jun 35 line (where the order flow is) are priced at almost the same vol. Aug vol is well below Jun but ATM is priced at the same level (ish) as May. Nice...

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).

We can see the stock can be quite choppy. On the vol side, check out how high IV30™ has risen of late. Specifically:

IV30™: 35.8
HV20: 27.31
HV180: 21.30

Or, in English, IV30™ is now 68% higher than the long-term historical (HV180).

Possible Trades to Analyze
Read the news, see if this is just takeover chatter on a reflection from a peer or if it's something else. Owning Jun to sell May at slightly elevated vol in the sale seems like it's worth examining. Diagonals or even straight calendar spreads may be worth some analysis.

This is trade analysis, not a recommendation.

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