Wednesday, August 3, 2011

E*TRADE Financial (ETFC) - Vol Explodes But Still Below Short-Term Stock Moves

ETFC is trading $14.61, up small but with IV30™ up 28.8%. The LIVEVOL® Pro Summary is below.


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I wrote about ETFC about a week ago, on 7-25-2011. You can read that post here:
ETFC, AMTD - Vols Pop, Stocks Pop, Takeover Rumors and Pressure Heighten

I also wrote about ETFC five days before that, on 7-20-2011. You can read that post here:
E*TRADE Financial (ETFC) - Stock Pops on Citadel Push to Sell

Basically, Citadel is pushing for ETFC to sell itself and the markets have reacted. The news on 7-26-2011 from Briefing sums it up quite well -- here's a snippet:

FBR notes the likelihood of a near-term transaction involving AMTD and ETFC has increased substantially given the developments over the past week. On paper, a combination of the two online brokerage firms makes sense given the meaningful cost and revenue synergies that would likely result. However, firm still sees several obstacles standing in the way of an actual agreement in the near term, primarily related to the size of ETFC's loan portfolio and the significant capital infusion that would likely be required.
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Today I found ETFC using a custom scan I built searching for names where IV30™ is up at least 10% on the day. The scan details are below with a snapshot if you want to build it yourself in Livevol® Pro.

Custom Scan Details
Stock Price GTE 10
Average Option Volume GTE 1,200
Days After Earnings GTE 5 and LTE 60
IV30™ Percent Change GTE 10%
IV30™ GTE 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

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

IV30™: 58.04
HV20: 69.53
HV180: 34.61

I've highlighted the current vols -- even as IV30™ has exploded today, it's still below the realized movement of the stock over the last 20 trading days. In English, the rising vol is still below the actual movement of the stock (in the recent past).

On the stock side we can see how volatile the underlying has been -- a gap up, a trend higher, and then substantial drops over the last week.

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

For both the front two months the upside skew is bid. In English, the vol in the OTM calls rises with each higher strike, which is the opposite of "normal" skew. Top read more about "normal" skew, you can read this post: Understanding Option Skew.

It is also interesting that the ATM vol in Aug is lower than in Sep, yet the upside skew is higher vol in Aug than Sep. Let's turn to the Options Tab for completeness.

Possible Trades to Analyze
1. Calendar skew spread the OTM calls
With the Aug OTM calls priced to higher vol than the Sep, a calendar spread may be worth analyzing. Diagonal calendars may also be in play as the higher delta (lower strike) Sep calls have even further depressed vol relative to the same strike in Aug. Of course, that's also a delta bet (and more expensive).

2. For the vol buyers out there, the ATM strike in Aug is priced to ~54 vol. That implied is lower than the HV10 (88.28), HV20 (69.53) and the HV30 (59.20). Of course, comparing that implied to longer-term measures of HV reverses the conclusion -- i.e. the longer-term HV is well below the Aug ATM options... so ya know... potato -- potahto.

This is trade analysis, not a recommendation.

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