Friday, June 24, 2011

Deutsche Bank (DB) - The Euro, Why it Exists, Why it Can't Go Away and Who's Responsible

DB is trading $55.98, down 3.3% with IV30® popping 15.6%. The LIVEVOL® Pro Summary is below.


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Deutsche Bank AG is a global investment bank. The Company offers a variety of investment, financial and related products and services to private individuals, corporate entities and institutional clients around the world.

I found this stock using a real-time custom scan. This one hunts for high vols. The story is all about Europe and the Eurozone. Here's a snippet from a Reuters report, today:

Shares of European banks traded in the United States slumped on Friday as investors continued to fret over Greece's debt situation and new concerns about Italy added to the uncertainty.

Italian banks dropped on concerns about their capital positions and after a Moody's downgrade threat on the group.

Greece remained in view as the country's government faced an electorate vehemently opposed to austerity measures that must be passed in parliament next week to avert default, but progress is being made in persuading banks to take part in a second bailout.
Source: Reuters

I wrote about the EU and its various debt issues on 5-18-2010. Yeah, 2010. Oddly enough, when I re-read it, it's as though I wrote it today... Which means there hasn't been a lot of remedial action taken in the eyes of the market. Here's that summary -- a blurringly fast review of what's happening in Europe.

The Treaty of Maastricht (formally, the Treaty on European Union) was signed on February 7th, 1992 by the members of the European Community in Maastricht, the Netherlands. Amongst other things, it created the rules (requirements) for joining the European Union (i.e. the EuroZone).

By amalgamating these currencies, countries like Spain, Portugal, Italy and Greece, which were traditionally agricultural economies, are now able to borrow money with the same terms as the highly efficient and industrialized economies (i.e. Germany).

The requirements to enter the EU were focused around debt, inflation and trade. Greece did not meet the requirements, but never fear, Goldman Sachs to the rescue. In a billion Euro swap using the Japanese Yen, Greece was able to "move" (read: hide) debt off the books and allow it to conform to Euro requirements. In fairness to Goldman, Greece and the EU were highly motivated to make this happen, so while Goldman were the actual "arrangers", this thing was gonna happen almost no matter what (that's just my opinion).

Of course, no matter how you "arrange," reality strikes back. It's really no surprise to the open eyed that Greece is now in a huge amount of trouble. I understand that at one point they had worse debt ratios than Argentina and Russia when those countries defaulted (please verify this on your own).

For all you who think Greece is going to get "kicked-out" of the EU; in the words of the magic 8 ball, "Signs point to no." The extrication of a country is almost impossible, and the implication for the future is an even greater deterrent.

Keep in mind that Germany's geo-political clout stems from the EU existing and growing, without it, they're just Germany, with it, they are Europe (is there any precedence to worry about that?... hmmm). The growing risk now is that Spain, Italy, Portugal, Romania, Hungary and a whole bunch more Eastern European countries are on the verge of similar calamities. FYI, some would consider my use of the word "risk" a vast under statement.

Ok, quick and dirty lesson over, onto trading and options markets.

Let's get to DB and the custom scan.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). 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 IV30™ simply because earnings are approaching.

The DB Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

We can see:
IV30™: 43.11
HV20: 32.07
HV180: 29.76

So, IV30™ is elevated relative to the short-term and long-term realized movement of the stock, and the move today has widened that gap substantially.

Let's turn to the Skew Tab.

The shape of the skew is normal in that it's downward sloping across the three front months, while only Aug (yellow) shows a slight kink. In other words, the vol is elevated across all strikes and no specific strikes seem out of whack based on order flow.

Let's look to the Options Tab (below).

Note the vol in the Jul 47.5 puts -- 53.18 on a stock with HV180 of 29.76.

Possible Trades to Analyze
This really depends on your view. Is Europe gonna get better? Get worse? Stay here? Tough to buy this vol, but then again, does 43 vol in DB really reflect the risk of the entire Eurozone collapsing?

This is trade analysis, not a recommendation.

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