Tuesday, July 5, 2011

InterDigital (IDCC) - Stock Pops on Patents, Vol Pops Twice

IDCC is trading $45.14, down 3.7% with IV30™ up 3.8%. The LIVEVOL® Pro Summary is below.


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InterDigital, Inc. (InterDigital) is a holding company, and its various subsidiaries engage in technology research and development activities or in the prosecution, maintenance, enforcement, and licensing of patents.

The stock popped more than $6 on Friday on interesting news in a similar company. I've included a snippet from The Motely Fool:

InterDigital popped 17% in intraday trading today. The strength in bids for Nortel's patents was surprising and bodes well for the value of InterDigital's patent portfolio.

InterDigital makes money from patent licensing. It owns 8,800 U.S. and foreign patents, and has nearly 10,000 patent applications pending, primarily related to wireless communications. The strong demand and high bids for Nortel's communications patents are shedding new light on the earnings potential of InterDigital's intellectual property.
Source: InterDigital Shares Popped: What You Need to Know

Today, the stock shows up on the real-time custom scan for calendar spreads between the front two months.

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.

Let's turn to the Skew Tab, (below).

There's a pretty clear elevated vol in Jul relative to Aug. The next earnings date for IDCC should be in the Aug cycle. The last earnings date was 4-27-11. Last year, with earnings on 4-28-2010, the Jul cycle was 7-28-2011, so there you go... The vol is elevated in Jul because the recent news and stock movement off of that news.

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 stock pop of late. Note also the stock gap down two earnings cycles ago. On the vol side, the IV30™ continues to rise today and remains above the historical measures. Specifically:

IV30™: 67.68
HV20: 59.30
HV180: 44.99

So the stock was up $6.02 on Friday, ad is now down $1.73, today. The volatility feels like it should be elevated.

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

Potential Trades to Analyze
There are a bunch of ways to trade this -- all essentially pure speculation.

1. Calendar spreads:
a. The Jul/Aug ATM call spread sells ~76 vol and purchases ~66 vol while owning earnings.
b. The Jul/Aug OTM call spread sells ~78 vol and purchases ~66 vol while leaving more room for stock movement in Jul, easing up on the gamma.

2. Sell vol:
a. The ATM straddle is worth ~$4.90. A sale gives room to ~$40 and ~$50 on Jul expo. But the again, the stock moved $6.02 on Friday.
b. Selling the ATM straddle and covering with the 41/50 strangle collects ~$3.00 and wins if IDCC is in ($42, $48) while risking $2.

3. Buy Vol:
Buying the downside on a 1x2 is an interesting trade. The Jul 45/42 1x2 put spread can be done for ~even and wins with IDCC below $45 to the downside (but above $39), with no upside risk.

This is trade analysis, not a recommendation.

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