Friday, August 12, 2011

Avon Products (AVP) - A Different Vol Comp as Delta and Vega Buyer Steps in Jan

AVP is trading $21.51, up 2.4% with IV30™ down 0.4%. The LIVEVOL® Pro Summary is below.


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Avon Products, Inc. (Avon) creates, manufactures and markets beauty and non-beauty-related products. The Company’s product categories are Beauty, Fashion and Home.

This is an order flow note as we have enough vol posts to analyze and more will come next week. AVP has traded over 15,000 contracts on total daily average option volume of just 5,026. Calls have traded on a 45.4:1 ratio to puts. The action is in the Jan'12 22.5 calls where over 10k have traded. The trades look like purchases, though the vol in Jan'12 is down. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Jan'12 22.5 calls are mostly opening (compare OI to trade size). When looking down the entire option chain for AVP, only the Aug 20 puts show a larger OI than 10,000, so this trade size is notable for AVP.

The Skew Tab snap (below) illustrates the vols by strike by month.

I've included the front four months so we can get the Jan'12 skew in there. In general, the skew across the months looks pretty normal -- even the Jan'12 22.5 calls aren't showing a kink in vol. The Aug 23 calls do show some bid vol, but that's just a nickel bid, so... ya know... not that exciting.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

While the stock chart for AVP looks like essentially every other company in the US market, the vol chart doesn't. The HV20 is well above the IV30™. In English, unlike the vast majority of the market, AVP stock has moved more than the implied -- i.e. the option markets have reflected less stock movement than was actually realized. Hmmm... Right now the vols like this:

IV30™: 40.80
HV20: 57.57
HV180: 28.69

It's also interesting to note that the HV10 is 75.72 -- so well above the implied. It is equally important to note that the implied is well above the long-term historical average (HV180) -- so this isn't really "cheap" vol.

Possible Trades to Analyze
The next earnings cycle for AVP looks to be after the Oct expiration cycle (just a guess) as the last two Oct earnings reports were on the 28th and 29th in 2010 and 2009, respectively. That would make the Jan'12 options an earnings cycle (sort of -- the Nov options will be the real cycle).

With vega buyers in Jan and the vol down today, it's not the worst idea in the world to analyze buying some vega. Having said that, let's not forget the relative levels of the longer-term HV to the IV in Jan -- i.e. ~29 to ~37. Not an obviously "cheap" purchase by any stretch.

This is trade analysis, not a recommendation.

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