Friday, July 1, 2011

Gen-Probe (GPRO) - Depressed Earnings Vol to Front; Takeover/Not Takeover... Both?

GPRO is trading $69.91, up 1.1% with IV30™ down 2.8%. The LIVEVOL® Pro Summary is below.


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Gen-Probe Incorporated (Gen-Probe) is engaged in the development, manufacture and marketing molecular diagnostic products and services, which are used to diagnose human diseases, screen donated human blood, and ensures transplant compatibility.

I wrote about GPRO on 5-23-2011. You can read that post here:
Gen-Probe (GPRO) - Elevated Vol on Takeover Bids, Earnings Gaps and Calendar Spreads

The impetus for the last post was the news:
From the post on 5-23-2011:
The stock gapped up on the last earnings on 4-28-11 going from $70.16 to $79.61. Then, a few days ago (5-18-2011), the stock gapped up more than $7 on a bidding war for the stock. In a twenty calendar day period, the stock went from ~70 to over $86.

We can see the stock is now back around $70 -- so a whole lot of movin', but not a big change in the underlying. The most recent drop came on 6-6-2011. Here's the news from, written by a friend of mine -- Brendan Conway:

Gen-Probe Inc. takeover speculators got crushed in the options market Monday, as new doubts arose that the medical-diagnostics company will be acquired.

Traders closed out bullish positions in call options granting the right to buy the San Diego firm's stock while others scooped up those options for a fraction of their previous value as prices sank Monday. The action comes after The Wall Street Journal reported that most potential suitors have dropped out of the bidding for the company.
Source: As Gen-Probe Suitors Pull Out, So Do Options Traders

So there you have it... Buy 'em, no, just kidding...

The stock came up on the same real-time custom scan for calendar spreads between the front two months. This time however, the back month has an earnings report.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 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).

We can see how the front month is elevated to the back and both months show a parabolic skew, reflecting both upside and downside risk. The ATM vol diff is ~9 vol points, or, said differently, Jul vol is ~ 23%higher than Aug vol with earnings.

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).

On the vol side we can see the IV30™ is in between the long-term historical trend in realized vol (HV180) and the short-term trend (HV20). HV10 is just 22.92 -- so the stock has found a quiet time for last couple of weeks.

IV30™: 43.77
HV10: 22.92
HV20: 52.84
HV180: 30.36

This stock can gap, but it's quiet time now -- or at least, it has been.

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

Potential Trades to Analyze
Last time this showed up on the calendar spread scan, selling the gamma (front month) was not good news. It feels like relatively similar risk, the front month last time was priced at ~50 as well, though the back month was 43 vol as opposed to 41 this time... and there weren't earnings embedded in the back.

1. ATM calendar spread
The Jul/Aug ATM calendar straddle sells ~ 9 vol points higher than it purchases and still allows for ~$5.50 move away (up or down) from $70 for the front month short straddle.

2. OTM calendar spread
The Jul/Aug 65 put spread, or the Jul/Aug 75 call spread, both sell ~ 11 vol points higher than they purchase (so slightly elevated to the ATM vol diff) while taking on a delta bet.

This is trade analysis, not a recommendation.

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