Wednesday, May 25, 2011

VanceInfo Technology (VIT) - Exploding Vol ,Dipping Stock on Fraud Clusters

VIT is trading $21.16, down 3.5% with IV30™ popping up 20.2% as of ~11:05am EST. The LIVEVOL® Pro Summary is below.


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VanceInfo Technologies Inc. is an information technology (IT) service provider and an offshore software development company in China.

I wrote about this one for (OptionsProfits), so no specific trade analysis here, but this is some of the most interesting stuff going on right now in the option market, IMO. The stock has had a rough time of late, sinking more than 33% since 5-13-2011. The drop started with a poor earnings announcement. He’s a quick summary:

What: VanceInfo Technologies (NYSE: VIT ) dropped 12% in intra-day trading today after reporting inline first-quarter earnings.

So what: Non-GAAP EPS of $0.20 grew 10% year over year and met the consensus estimate. Management expects second-quarter non-GAAP EPS of $0.22, up 10% year over year and inline with the consensus estimate.

Now what: It's a rare quarter that VIT doesn't beat the consensus estimate and GAAP EPS growth is slowing. Although revenue growth is strong at about 29% year over year, EPS is suffering from a rising share count, lower government subsidies, wage inflation and revenue mix shift to China (which is affected by the Chinese New Year holiday in the first quarter).
Source: The Motley Fool, written by Cindy Johnson.

Today the stock drop and vol pop continues along with bearish order flow. The Chinese accounting (auditor) problems loom over the entire market. Here’s a quick snippet from Reuters:

NEW YORK/BANGALORE, May 23 (Reuters) - (Reuters) - The auditor at Longtop Financial Technologies Ltd (LFT.N) quit and a U.S. regulator has opened a related probe, deepening concern about possible accounting irregularities at Chinese companies.
Source: Reuters

Today, over 7,000 contracts have traded today on total daily average volume of just 1,031. Puts have traded on a 7.2:1 ratio to calls. Jun 20 puts are the most active – they look like purchases. The Livevol® Pro Stats Tab is included below.

Let’s turn to the Charts Tab (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 drop off of earnings (and then the continued drop). We can also the IV30™ has exploded to over 110. Let’s turn to the Skew Tab to investigate line-by-line and month-to-month vols.

The Skew shape is “normal” and the front two months have similar shapes with the front elevated to the back. I do note the abrupt downside skew – the ATM vol in Jul is ~100 compared to the Jul 12.5 puts (~149.5) and the Jun 17.5 puts (~143 vol). Let’s look to the Options Tab.

I actually think the Chinese accounting scandal will worsen as fraud tends to cluster (see my paper "The Fraud Swap" published a few years ago). The question is how far can these companies go down? Is it an Enron, MCI WCOM thing? Do they go to $0? Or is this a down 50% thing, where the skew to the downside might be a sale? Do these stocks rally?  I guess we'll have to see...

This is trade analysis, not a recommendation.

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