Tuesday, October 4, 2011

Interoil (IOC) - Exploding Vol in Dipping Stock

IOC is trading $32.50, down 17.2% with IV30™ up 9.4% as of ~ 11:15am EST. The LIVEVOL® Pro Summary is below.


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InterOil Corporation (InterOil) is an integrated energy company operating in Papua New Guinea and its surrounding Southwest Pacific region.

The news driving the company surrounds a new contract. Here is a news snippet to summarize:

The company has planned an LNG project in Papua New Guinea, which gives it access to the hungry energy markets of Asia. But last week, the country's energy minister suggested that InterOil might need to make major changes to the project, causing shares to plummet. With the government seeking a larger facility than InterOil planned, the company could have trouble getting financing.
Source: The Motley Fool

IOC has hired Morgan Stanely, Macquarie Capital and UBS to help find an investing partner in the Papua New Guineas project according to Reuters.

Let’s 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 that IOC was a $60.92 stock as of 9-20-2011 with IV30™ at 71.21. As of this writing, IOC is down to $32.50 (down 54%) with IV30™ up to 162.30 (up 128%). Or in English, the news has been bad and the risk is significantly elevated even at these stock price levels.

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

We can pretty easily see two phenomena, here:

1. The front month is elevated to the back across all strikes. The last two earnings cycles at this time of year were 11-4-2009 and 11-15-2010, so it’s reasonable to assume that earnings for IOC will be in the Nov cycle and certainly outside of the Oct cycle. Given that the vol is elevated in Oct even with earnings vol embedded in Nov reflects the substantial (read: company valuation changing) impact of this new project for IOC.

2. The upside skew in Oct is bid relative to the ATM, unlike Nov. Or, again in English, the option market reflects substantive upside risk (potential) in the near-term as well given the stock’s collapse in the last two weeks. Having said that, most of those calls are $0.10 bid or lower, so the vol number may be a bit misleading.

Finally, let’s turn to the Options Tab for completeness.

I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. Having said that, an interesting position to examine could be collecting premium in the OTM downside vol in IOC. One view is that perhaps the news is out and the catastrophic downside is priced to fear rather than reality. Ratio put spreads could be an interesting position to analyze. Or not?...

This is trade analysis, not a recommendation.

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