Monday, August 22, 2011

Lender Processing Services (LPS) - Elevated Vol to Annual Low

LPS is trading $17.54, up 2.6% with IV30™ down 6.0%. The LIVEVOL® Pro Summary is below.


Click for Free Trial


Lender Processing Services, Inc. (LPS) is a provider of integrated technology and services to the mortgage lending industry, with mortgage processing and default management services in the United States.

Last time I wrote about this company (on 6-6-2011), IV30™ was trading at ~57 and I noted how high the vol was in the front month relative to the second. Today, I found this stock using the real-time custom scan that hunts for high vols relative to the short-term and long-term historical measures.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). 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 IV30™ simply because earnings are approaching.

Let's start with the Skew Tab.

We can see a smooth, normal looking skew, with the downside and upside front month vols elevated to the back. Oddly, the ATM vol in Oct is actually higher than the vol in Sep. But the story here is really in the overall vol chart.

The LPS 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).

We can see:
IV30™: 84.18
HV20: 59.96
HV180: 36.77
HV10: 81.29

So, IV30™ is elevated relative to the short-term and long-term realized movement of the stock, unlike a number of other companies we've looked at together where the implied has popped, but not to the same level as the short-term realized movement. I do note that the shortest term measure of HV (HV10) is the highest (and thus the closest to the IV30™). In English, the 30-day implied has been trading closest to the 10-day realized, of late.  The next earnings release should be after the Oct cycle (ish), so this is likely not earnings related.

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

Possible Trades to Analyze
1. ATM covered front vol sale
An interesting trade to analyze, sort of plain vanilla, is a sale of ATM vol (either straddle or one-sided) and covering with the wings.

2. OTM covered front vol sale
Another approach is to dabble in the wings, particularly the downside where the skew does bend up to the OTM puts.  Covering with a further OTM option protects the position (limits loss).

3. Uncovered front OTM vol sale
The 52 wk range for LPS is [$15.57, 34.75], like most of the market, this stock is trading much closer to it's annual low than high (the low was made on 8-8-2011, so a few weeks ago). A sale of the OTM puts (14 or 15 strike) has limited downside by virtue of the realities of stock -- it can't go below $0 and is interesting to examine.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:

No comments:

Post a Comment