Tuesday, August 2, 2011

Rambus (RMBS) - Elevated Vol, Court's Final Ruling and Skew

RMBS is trading $13.59, down 1.0% with IV30™ down 0.8%. The LIVEVOL® Pro Summary is below.


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Rambus Inc. (Rambus) is a property and technology licensing company. The Company’s primary focus is the creation, design, development and licensing of patented innovations, technologies and architectures that are foundational to all digital electronics products and systems.

RMBS has created (and continues to create) new technologies and its ability to defend those innovations with patents (and licensing of those patents) is really the life blood of the company. It’s perpetually in court cases with seemingly gigantic repercussions. There was actually a document destruction case recently decided that went against RMBS, which may be of interest. Here’s the one sentence summary:

A decision will stand that Rambus Inc. (RMBS) destroyed documents as it pursued patent-infringement claims against Micron Technology Inc. and Hynix Semiconductor Inc. (000660), a U.S. appeals court said.
Source: Bloomberg, written by Susan Decker.

Today I found this stock using a real-time custom scan. This one hunts for high vols.

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.

The RMBS 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™: 51.52
HV20: 36.79
HV180: 38.83

So, IV30™ is elevated relative to the short-term and long-term realized movement of the stock. On the stock side, we can see the gap down on 5-13-2011 which was the start of the document destruction case. The news that drove that drop is included below:

SAN FRANCISCO (AP) -- Shares of Rambus Inc. sank Friday after a U.S. appeals court determined that the technology licensor did destroy documents in patent disputes with chip makers Micron Technology Inc. and Hynix Semiconductor Inc. The move potentially threw out a $397 million settlement that Rambus was due to receive from Hynix and kicked both lawsuits back to lower court.
Source: AP

Let’s turn to the Skew Tab and examine the line-by-line and month-to-month vols.

What’s of most interest to me is the vol diff that opens up between the front and back OTM calls. In English, the OTM call sin Aug are priced to substantially higher vol than the OTM calls in Sep. It’s this vol diff that caught my attention.

Let's look to the Options Tab (below) for completeness.

I wrote about RMBS for TheStreet.com (OptionsProfits) so no specific trade analysis here. Having said that, it seems like the document destruction case (and loss of potentially hundreds of millions of dollars) has been digested by the market and that news is now finally over. That leaves some interesting skew.

This is trade analysis, not a recommendation.

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