Wednesday, October 12, 2011

Marathon Oil (MRO) - Expensive Depressed Earnings Vol?

MRO is trading $23.77, up 0.9% with IV30™ down 6.1%. The LIVEVOL® Pro Summary is below.


Click for Free Trial


Marathon Oil Corporation (Marathon) is an integrated international energy company engaged in exploration and production; oil sands mining; integrated gas, and refining, marketing and transportation.

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

Custom Scan Details
Stock Price GTE $7
IV30™ - HV20™ LTE -8 GTE -40
HV180™ - IV30™ GTE 7
Average Option Volume GTE 1,200
Industry != Bio-tech
Days After Earnings GTE 32

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 short-term implied vol (IV30™) that is depressed 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 purchasing depressed IV30™ relative to HV20 simply because of a large earnings move.

The MRO 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).

A couple of things to note:
1. The gigantic gap down on 7-1-11 from $52.68 to $32.95 or 37%. That was in fact, nothing at all -- it was a spin-off of Marathon Petroleum, so that gap down can be ignored.

2. The vol diff that has opened up between the IV30™ and the realized vol measures (HV20 and HV180). Specifically:

IV30™: 49.05
HV20: 64.08
HV180: 70.67  <----> HV180 without the articifical gap up off of the spin-off is ~30.

Adding a twist here, MRO has earnings due out in the Nov options cycle. So, the IV30™ is depressed and that includes an embedded vol event. But there's more...

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

The Nov ATM straddle is priced at ~48 vol. With HV20 above those levels and earnings included, that seems like a decent purchase, but... Here are the volatilities of the ATM straddle for the last eight quarters one day before earnings:


So what? They're each below 48 vol. Historically, MRO earnings vol is priced pretty fair, which is to say, the one day straddle has gone down 3.5% on average (hypothetically 0% would mean perfectly priced vol). If Nov is priced to 48 vol now, hypothetically as earnings approach that vol should increase. So in other words, this depressed vol actually feels kinda, high?

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:

No comments:

Post a Comment