Wednesday, August 17, 2011

Virgin Media (VMED) - Calendar, Earnings Vega and "October"

VMED is trading $25.47, up 1.8% with IV30™ down 4.2%. The LIVEVOL® Pro Summary is below.


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Virgin Media Inc. (Virgin Media) is engaged in entertainment and communications business. The Company has two segments: Consumer and Business. The Company is a provider of broadband Internet, television, mobile telephony and fixed line telephony services that offer a variety of entertainment and communications services to residential and commercial customers throughout the United Kingdom.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the second and third months (keep in mind, the “first month” is expiring in three days, so the “second month” is soon to be the front). VMED has a uniqueness to it though, as earnings are due out in the third expiration.

Custom Scan Details

Stock Price GTE $5

Sigma2 - Sigma3 GTE 7

Average Option Volume GTE 1,000

Industry isNot Bio-tech

Days After Earnings GTE 5 and LTE 50

Sigma2, Sigma3 GTE 1

The goal with this scan is to identify third months that are cheaper than the second month by at least 7 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 nicely consistent shape to the curves – both are parabolic, but the Sep options are priced to notably higher vol than the Dec options. Another point to note, once Aug options expire, the Oct option cycle will appear for VMED. i.e. The Sep/Dec comp will become months 1 to 3, not 2 to 3 or 1 to 2.

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).

I've highlighted the recent stock pop. It’s interesting to see how the HV20 has popped (the stock has moved a lot), while the IV30™ has dipped. This is a nice example of how vol can dip as stock price moves higher even though the actual realized stock movement is increasing.

For five out of the last six earnings cycles, selling the VMED one day ATM straddle before earnings and buying it back the next day was a winner. The one time it wasn’t, it was breakeven. In English, VMED vol has over stated the earnings move five of the last six cycles (this type of analysis is available in Livevol® Excel Premium).

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

I wrote about this one for the (OptionsProfits), so no specific trade analysis here. But, the prospects of owning vega that includes earnings against selling the front month without earnings and is elevated to the back seems like a reasonable position to analyze. The question is which strikes to approach.

This is trade analysis, not a recommendation.

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