Monday, June 6, 2011

Lender Processing Services (LPS) - Term Structure Vol Diff

LPS is trading $25.01, down 2.3% with IV30™ up 1.9%. The LIVEVOL® Pro Summary is below.


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Lender Processing Services, Inc. (LPS) is a provider of integrated technology and services to the mortgage lending industry, with mortgage processing and management services in the United States.

The stock 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 >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

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.

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

I've zoomed in on the ATM strikes -- note how the 25 strike in Jun is bid while the 25 strike in Jul is actually slightly depressed. That makes for an interesting calendar spread to examine, with a ~10 vol point diff.

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).

It's interesting that the implied has traded over the realized vol for the full six months on this chart. The vol spread as of right now is near a high. Check out how high IV30™ is relative to the short-term historical vol (HV20™) and the long-term historical vol (HV180™). Specifically:

IV30™: 56.56
HV20: 36.28
HV180: 32.06

The stock has been headed lower of late -- it was ~$35 in Mar and now is more than 25% lower.

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

Potential Trades to Analyze
1. ATM calendar spread:
a. The Jun/Jul ATM straddle calendar spread and sells ~10 vol points higher than it sells.

b. Earnings are due out after the Jul cycle (that's a projection). If that's the case, the Sep cycle is priced at ~55 vol (so ~the same as Jul). The Jun/Sep calendar is an interesting trade to examine while owning earnings. If that Jun/Sep works out, the trade might be extended with a sale of Jul. That would be a double sale of vol to owning depressed earnings vol.

2. OTM calendar spread:
Similar to above, but using strangles instead of the ATM straddle.

This is trade analysis, not a recommendation.

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