Monday, June 27, 2011

EXCO Resources (XCO) - Deal In Question; Vol Pops, Stock Drops

XCO is trading $17.21, down 8.4% with IV30™ up 18.6%. The LIVEVOL® Pro Summary is below.


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EXCO Resources, Inc.(EXCO) is an independent oil and natural gas company engaged in the exploration, exploitation, development and production of onshore North American oil and natural gas properties.

On 11-1-2010 the news was this:
Douglas H Miller, the chairman and CEO of ExCO Resources Inc (XCO) announced an offer to buy XCO stock for $20.50 per share. The deal is valued at $4.36 billion. XCO opened 35% higher than the pre-announcement closing price.

Here's the news today from AP that's driving the stock and vol:
NEW YORK (AP) -- Shares of Exco Resources Inc. dropped more than 8 percent on Monday after media reports said CEO Douglas Miller was mulling taking a portion of the oil and gas company private because he was having a hard time coming up with the financing for the $4 billion-plus deal he proposed involving the whole company.

Miller made the offer in November and Exco said two months later that it was considering options including a possible sale.

Media reports Friday said Miller was being squeezed to give Exco's board a final offer and is now considering letting part of the company remain public so he doesn't have to raise as much money.

At the time of his $20.50 per share offer, Miller told Exco's board he planned to use a "significant portion" of his 3 percent stake to raise money. Miller also said he expected contributions from senior management and outside investors, and he planned to borrow.
Source: Exco falls on reports CEO mulling shrinking deal

I found this stock using a custom scan I built searching for names where IV30™ is up at least 10% on the day. The scan details are below with a snapshot if you want to build it yourself in Livevol® Pro.

Custom Scan Details
Stock Price GTE 10
Average Option Volume GTE 1,200
Days After Earnings GTE 5 and LTE 60
IV30™ Percent Change GTE 10%
IV30™ GTE 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

The XCO 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).

IV30™: 45.39
HV20: 29.67
HV180: 36.38

So the short-term implied is elevated to the short-term and long-term realized vols.

I've highlighted the stock gap down and the vol pop that goes with it. The price right now is the lowest it's been since before the takeover was announced.

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

We can see how the front month has a parabolic shape -- bid up to the OTM calls. The vol diff opens on the 20 strike, though the Jul 20 calls are just nickel bid. Similarly, the Aug 21 calls are nickel bid.

Finally, let's look to the Options Tab.

Possible Trades to Analyze
This really comes down to expectations on the follow through (or lack thereof) of this takeover bid. Considering that XCO was a $14.83 stock and popped to as high as $20.37 on the takeover news, 45 vol isn't necessarily "too" high.

1. Cheap bet to the upside in Jul:
The Jul 19/20 call spread sells ~4 vol points higher than it purchases, which is a nice trick in a call spread in the same month.

2. Calendar Spread:
The Jul/Aug 20 call spread sells ~45 vol and purchases ~33 vol.

3. Buy the vol:
Maybe the vol is too cheap and the rocky future pushes stock around in Jul. The ATM Jul straddle costs ~$1.50 and the stock has moved $1.57 today, alone.

This is trade analysis, not a recommendation.

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