Monday, August 22, 2011

U.S. Bancorp (USB) - The Market Prices... Disaster?

USB is trading $20.80, up 1.2% with IV30™ down 7.6%. The LIVEVOL® Pro Summary is below.


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U.S. Bancorp is a multi-state financial services holding company. U.S. Bancorp provides a range of financial services, including lending and depository services, cash management, foreign exchange and trust and investment management services.

The elevated vol in the market is obviously affecting the vast majority of individual stocks, but the financial industry is one of particular interest to me as the "fear" of catastrophic failures still looms. For those interested in the note I posted on BAC, you can go here:
Bank of America (BAC) - The Odds of the Largest Bankruptcy... Ever...

Today USB came up on a real-time custom scan for calendar spreads between the front two months. As I looked it over, I noticed some interesting phenomena in the option chain beyond the calendar vol diff. Let's start simple and take a look at the other "stuff" after.

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.

Let's start with the Skew Tab (below).

We can see a rather pretty skew shape for both months -- consistent and smooth. I don't like either of those adjectives when looking for a skew trade, but that's what we got. Obviously, the front is elevated to the back (red line is above the yellow line). I believe the next earnings cycle for USB will be after the Oct cycle (i.e. in Nov), so owning Oct doesn't own an earnings report. For what it's worth, the Dec cycle is priced below both Sep and Oct (in terms of vol) for you vega buyers out there.

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 almost obligatory stock drop, vol spike and implied trading below short-term realized vol. This is how a number of stocks look right now on the vol side. So far, this looks like a reasonable calendar spread to analyze, nothing really out of the ordinary other than, yeah, some nice vol diff.

Here's where it gets a little more interesting -- if for nothing else, from a market sentiment point of view. Let's start with the Options Tab (below).

Note the 15 strike puts in Sep. Those are priced at ~87 vol, or ~$0.16 fair value. And why does that matter? Well, the 52 wk range in USB is [$20.15, $28.66]. Keep in mind, those Sep 15 puts are winners to the longs on expo "iff" USB stock dips to $14.85. Yeah, that's a lot lower than the 52 wk low. In fact, USB hasn't been below $20 in more than 2 years. I've included a long-term stock chart for USB from Yahoo! finance, below.

Potential Trades to Analyze
I've drawn a line at $15. The only time USB breached that level was at market bottom in 2009. Before that, it was September... of 1997... The financial companies, banks in particular, have near-term options priced for a legitimate possibility (or fear) of a drop akin to the 2009 massive market bottom -- which were bank stock levels in the late 90's.

Why does that matter? Well, for those that are willing to bet against that type of stock market drop, "normal" calendar spreads are on the board with the possibility of adding naked short puts at levels like... well, like $15 for USB.

I always say it, but I want to emphasize this time:
This is trade analysis, not a recommendation.

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