Tuesday, September 6, 2011

AOL - Calls Trade on Valuation, Skew Bends, Vol Diff Opens

AOL is trading $14.96, up 3.2% with IV30™ up 5.0%. The LIVEVOL® Pro Summary is below.


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AOL Inc. (AOL) is a global Web services company with a range of brands and offerings and a global audience. This is a great order flow story based some interesting news -- which may or may not prove to be true.

First, the news:
Needham lowers its AOL tgt to $20 from $35 and reiterates its BUY rating on AOL because it believes that AOL should be taken private for its asset value. Firm calculates that AOL is worth $26/share in a liquidation scenario, excluding its upside optionality.
Source: Briefing.com (www.briefing.com)

AOL has traded just under 29,000 contracts on total daily average option volume of just 1,794. Calls have traded on a 7.2:1 ratio to puts. The action has been buyers in the Oct 15 and Jan'12 19 calls. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Oct 19 calls are mostly opening (compare OI to trade size). When looking down the entire option chain for AOL, I don't see any OI larger than 3,500, so this size is very large. The Jan'12 19 calls have traded over 6,500x on existing OI of just 421.

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

We can see the front is substantially elevated to back. There's a great vol diff that has opened up on the 16 strike -- it's spiked in Sep (not Oct) -- creating a 17 point vol diff.

Finally, the Charts Tab (6 months) is 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 stock collapsed off of earnings from $15.07 to $11.19 (or 26%). The implied is rising, but that earnings drop has pushed the short-term HV numbers up.

Possible Trades to Analyze
The Sep/Oct 16 calls spread is reasonable to analyze given the order flow in the Oct calls. That would be owning the order flow while scalping 17 vol points.

All sorts of calendars are on the board -- but that's short gamma and long vega in a stock where news is out that if realized, would move the stock (hurts short gamma) and kill vol (hurts long vega).

This is trade analysis, not a recommendation.

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