Thursday, June 16, 2011

InterDigital (IDCC) - Monotonic Term Structure Persists, Stock Drops

IDCC is trading $34.95, down 0.9% with IV30™ down 0.7%. The LIVEVOL® Pro Summary is below.


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InterDigital, Inc. (InterDigital) designs and develops advanced digital wireless technologies for use in digital cellular and wireless IEEE 802-related products and networks.

I wrote about this company ten days ago, on 6-6-2011. I noted that the term structure of vol showed a monotonic increase as we approached the front months as well as the activity from some put buyers in Jun and Jul. At the time, IDCC was trading $37.46. You can read that article here:
InterDigital (IDCC) - Vol Rising, Puts Trade

Today, the stock continues to appear on the real-time custom scan for calendar spreads. This time between the second and third months (since Jun is expiring tomorrow).

Custom Scan Details
Stock Price GTE $5
Sigma2 - Sigma3 GTE 7
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 and LTE 50
Sigma2, Sigma3 GTE 1

The goal with this scan is to identify third months that are cheaper than the second month by at least 7 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.

We can look to the Skew Tab (below) and see the elevated vol in the second month (yellow curve) relative to the third month (green curve).

There's a parabolic shape to the second month and a flatter shape to the the Sep options. Note the oddity here (which I discussed in the blog ten days ago) that earnings are due out after the Jul cycle, yet Jul is elevated.

Now we can 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).

As usual, I'm interested in the vol portion. Check out how high IV30™ is relative to the short-term historical vol (HV20) and the long-term historical vol (HV180). Specifically:

IV30™: 68.15
HV20: 42.28
HV180: 41.56

In the post ten days ago, those readings were:

IV30™: 64.76
HV20: 39.49
HV180: 40.96

So everything is higher, but the vol diff is still about 25 points. Interesting...

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

Potential Trades to Analyze
I'll actually copy and paste the company specific disclaimer from last time:
"This is certainly one that requires knowledge of the news that's driving vol up."

Having said that...

1. The Jul/Sep 35 straddle calendar spread purchases ~ 56 vol and sells ~68 vol while owning the earnings cycle in Aug.

2. Going diagonal with some deltas is also a possibility - for example the Jul 32/Sep 34 put spread sells ~70 vol and purchases ~57 while picking up that earnings and some negative deltas. If you're bullish, then the call side also has some potential trades.

Still, it would be nice to know what's goin' on with the term structure, first.

This is trade analysis, not a recommendation.

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