Monday, August 15, 2011

Camelot Information Systems (CIS) - Earnings Vol, Accounting Ambiguity and Calendar Spread

CIS is trading $8.44, up 6.4% with IV30™ up 2.3%. The LIVEVOL® Pro Summary is below.


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Camelot Information Systems Inc. (Camelot) is a holding company that conducts business, through its operating subsidiaries in China. The Company is a provider of enterprise application services and financial industry information technology (IT) services in China.

The stock just came up on the real-time custom scan for calendar spreads between the front two months, but with a twist again.

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.

As usual, we'll start with the Skew Tab to examine the month-to-month and line-by-line vols.

The skews are actually nicely parallel -- there's just a vol diff between the front and second months. The "twist" here is two fold:
1. CIS reports earnings on Thursday BMO (so two trading days before expo).
2. It's a Chinese public company traded here, automatically placing it (fairly or unfairly) in the ambiguous world of accounting opaqueness.

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 drop of late -- it's hit a new 52 wk low essentially everyday for the last week. On the vol side, the IV30™ has exploded into earnings, also breaking through a new 52 wk range (on the upside). Check out how high IV30™ is relative to the short-term historical vol (HV20) and the long-term historical vol (HV180). Specifically:

IV30™: 204.34
HV20: 79.06
HV180: 69.12

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

Potential Trades to Analyze
One of the "unusual" risks to these Chinese companies is the possibility that the stock halts for an extended period of time (like two months). That leaves risk to both long and short options as exercise decisions need to be made without full information. While the Aug/Sep 5 put spread could be an interesting position to analyze, at the same time, add to your analysis the possibility of wearing a position for two months with no stock and no idea how to value it.  In other words, there's a reason those puts are priced at 450 vol, and it's not just earnings risk.

This is trade analysis, not a recommendation.

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