Tuesday, June 7, 2011

Community Health Systems (CYH) - Elevated Vol on Billing Allegations

CYH is trading $25.92, up 1.9% with IV30™ down 1.5%. The LIVEVOL® Pro Summary is below.


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Community Health Systems, Inc. is an operator of hospitals in the United States. The Company provides healthcare services, through the hospitals that it owns and operates in non-urban and selected urban markets throughout the United States.

On 4-11-2011, this stock collapsed down nearly 36% ($14.41) on a nasty allegation from THC. I’ve included a news snippet, below from Bloomberg which also touches on the SDS market:

“Credit-default swaps on Community Health Systems Inc. (CYH) and Tenet Healthcare Corp. (THC) soared after Tenet sued the hospital operator for allegedly overbilling Medicare.”
Source: Bloomberg, Community Health, Tenet Default Swaps Climb on Overbilling Suit written by Mary Childs.

I posted this one to TheStreet.com's OptionsProfits, so no specific trades discussed here. Today, CYH just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Let’s first 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 on the allegation of overbilling from THC. The stock price recovered small for a while but is back to dipping down. The IV30™ popped ~15% on 6-6-2011 as CYH dipped another 5% on 6-6-2011. Right now the IV30™ is in between the the short-term historical vol (HV20) and the long-term historical vol (HV180). Specifically:

IV30™: 56.09
HV20: 30.72
HV180: 66.35

Let’s look to the Skew Tab (below) to examine month-to-month and line-by-line vols.

We can see how elevated the front month (red) is to the second (yellow). The next earnings release is due out at the end of July (projected), so the elevated vol in Jun is not reflecting an earnings date, rather some “other” risk – likely the lawsuit/allegations.

The skew difference between Jun and Jul widens to the downside pointing to downside near-term risk compared to further out.

Finally, let's look to the Options Tab (below) for completeness.

This is trade analysis, not a recommendation.

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