Friday, June 3, 2011

Southern Copper (SCCO) - Skew and Term Structure

SCCO is trading $35.03, down 1.3% with IV30™ up 1.8%. The LIVEVOL® Pro Summary is below.


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Southern Copper Corporation (SCC) is an integrated copper producer. SCC produces copper, molybdenum, zinc and silver. All of the Company's mining, smelting and refining facilities are located in Peru and in Mexico, and it conducts exploration activities in those countries and Chile.

So are we in an inflationary or deflationary period for commodities... A bubble or a long-term change?  There's been some interesting news of late in this sector and for this company.

Copper miners must tap new areas as demand soars, Bloomberg reports
Source: Yahoo! Finance

Then, on 5-31-2011, the stock gapped down about $2. Then on 6-1-2011 the stock went down another $1.30 to close at $33.18.

Today, the stock has 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).

There's a pretty clear term-structure difference between the front three months. There's also a vol spike to the upside in Jun OTM calls, but that looks to be sticky markets in the 41 and 42 calls more than anything else. Interestingly, the 39 calls have lower vol than the 38 calls making the Jun 39/41 c/s look rather juicy -- granted very low delta and wide markets.

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).

We can see the IV30™ has been rising of late. You can't see it in the 6 mos chart, but IV30™ has actually traded a little above 60 in the last 52 wks. The HV20 has paced the IV30™, both are now substantially elevated to the HV180 (long-term realized vol).

IV30™: 46.75
HV20: 50.32
HV180: 34.57

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

Potential Trades to Analyze
1. Inter-month call spread:
As I noted in the discussion of the skew tab, the Jun 39 calls show a slightly lower vol than the surrounding lines while the Jun 41 calls spike to 55 vol. The crucial part to this trade would be getting prices significantly better than the NBBO the bad way.

2. Calendar spreads
Jun/Jul, Jun/Sep, Jul/Sep or even Jun/Sep and after Jun expiration then Jul/Sep -- that last one would involve selling elevated vol twice to one depressed purchase, but risks being short gamma.

This is trade analysis, not a recommendation.

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