Monday, July 11, 2011

News Corporation (NWSA) - BSkyB Bid Chances Falling, Vol Explodes to Stock Drop

NWSA is trading $15.79, down 5.7% with IV30™ up 21.5. The LIVEVOL® Pro Summary is below.


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News Corporation is a diversified global media company. It has eight segments: Filmed Entertainment, Television, Cable Network Programming, Direct Broadcast Satellite Television, Integrated Marketing Services, Newspapers and Information Services, Book Publishing, and Others.

The news pushing the stock and vol surrounds the takeover bid for satellite broadcaster British Sky Broadcasting Here's a snippet from AP:

Amid signs the British government is looking at ways to block the deal following a phone hacking scandal that has already killed off the News of the World newspaper, investors think that Rupert Murdoch's News Corp. will have to scrap its bid to buy the 61 percent of BSkyB it doesn't already hold.
Source: AP -- News Corp, BSkyB shares slide on doubts over bid

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 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 start with the Charts on this one -- really interesting. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

Check out the stock collapse of late. NWSA hit as high as $18.20 on 7-5-2011, and is now below $16. The IV30™ is exploding. Looking back at the Jul 18 puts on 7-6-2011, we can see they were priced to a $0.70 x $0.80 market on 30 vol. Today those puts are worth ~2.15 priced to a $2.00 x $2.30 market. The vol in the 16 puts (now the ATM) is 54.

Let's look to the Skew Tab (below).

We can see the front month is elevated to the back quite substantially with 56 vol to ~44, respectively for those two months. Note that the next earnings cycle for NWSA is likely n the Aug cycle (early Aug), so the news driving the stock (and risk) is this BSkyB bid, not the earnings.

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

We can see where the action is today in the Jul 15 and Aug 14 puts. Both lines appear as substantially purchases, today. The Aug 14 line has no existing interest.

Potential Trades to Analyze
1. Buy Jul downside:
Even though vol has been and continues to be up, lookin' at the Jul options -- the vol still sorta feels low, no?

With the stock down over $2 in a few days and down ~ $1.00 today, the Jul 16 puts are only worth $0.55 mid-market with $0.21 in parity? Hmmm...

2. Calendar Spread
Going backwards for #1, a Jul/Aug 15 put spread sells the gamma in Jul while selling 16 points higher vol than it purchases. A nice boon here is that Aug has earnings and therefore an embedded vol event.

3. Totally opposite:
One week trade -- sell the Vol in Jul. Risky, but potentially a quick win (or loss).

Other stuff to be aware of:
News Corp US shareholder case adds hacking claims, provided by Reuters.

This is trade analysis, not a recommendation.

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