Tuesday, August 16, 2011

Cameron International (CAM) - Calendar Spread and Vol Comps

CAM is trading $48.91, down 1.4% with IV30™ unched. The LIVEVOL® Pro Summary is included below.


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Cameron International Corporation (Cameron) provides flow equipment products, systems and services to global oil, gas and process industries. Earlier today, Morgan Keegan downgraded their target on the stock to $61 from $68 according to Briefing.com (www.briefing.com). Couple that with a down day (so far) in the market and we get this ~1.5% drop in the stock price.

I found CAM because it came up on the real-time custom scan that hunts for calendar spreads between the front two months. I like this scan ahead of expo as it often times yields some nice short-term trades to analyze.

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 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 look to the Skew Tab to examine the month-to-month and line-by-line vols.

We can see the front two months share the same shape in the skew, while the Aug cycle is priced with notably higher vol. That vol diff widens out as we move to the downside puts.

Let’s turn to the Charts Tab (below) to get an idea of where vol is and to understand some comps. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

On the stock portion (top), we can see how well the stock did into and off of earnings. The drop of late is likely more about systematic risk than anything stock specific. We can also see the abrupt recovery from the lows a few days ago.

On the vol side (bottom), we can see how volatile the stock has been as the realized 20 day historical (HV20) is well above both the short-term implied and the long-term realized. Specifically:

IV30™: 52.40
HV20: 76.68
HV180: 38.63

So this is a case where the IV30™ is priced right in between the short-term historical and long-term historical, or in English, it feels kind of “fair.”

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

The ATM vol diff between Aug and Sep is ~11 vol points. Looking to the OTM puts, that vol diff grows to over 15 vol points. It’s that downside vol that caught my attention.

I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. But, I would note that the downside puts in Aug are still priced below the HV20. Ideally, we'd like to see the downside put vol above the HV20 (and IV30™) if taking a short gamma position for the short-term. If those puts were priced to 80 vol (HV20 is ~ 77), then the premium would be about $0.15 higher...

This is trade analysis, not a recommendation.

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