Thursday, October 6, 2011

McDermott Int'l (MDR) - Stock Pops Again, Vol Rises, Skew Turns

MDR is trading $14.26, up 6.8% with IV30™ up 13.2% as of ~11:35am EST. The LIVEVOL® Pro Summary is below.


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McDermott International, Inc. (MII) is an engineering, procurement, construction and installation (EPCI) company.

I wrote abut MDR just a few days ago, on 10-3-2011. You can read that post here:
McDermott (MDR) - Rising Stock and Rising Vol; Earnings Approaching

At the time, the stock was trading $11.26 with IV30™ at 82.07. The trend has continued. The vol and stock are still exploding with the action to the upside in the order flow – OTM calls are the flavor. Over 28,000 contracts have traded in the first two hours on daily average volume of just 3,870. Calls have traded on a 5.7:1 ratio to puts. Yesterday 17,288 options traded with calls trading on a 5.9:1 ratio to puts. The Stats Tab snap from today as well as the day’s biggest trades are included below.

Let’s turn to the Options Tab and check out the lines with the volume.

We can see the Oct 15 calls have traded over 10,000x on OI of less than 5,000. Let’s turn to the Skew Tab to examine the line-by-line vols and the monthly term structure.

Two things that pop out:
1. The front is substantially elevated to the back with Oct vol priced at 146 (up 19 vol points today) and Nov priced at 118 (up 14 vol points today). Yesterday Oct vol was up ~10 vol points and Nov was up ~5 vol points.

2. The upside skew in Oct is bid, or in English, the upside calls are priced to higher vol than the ATM and OTM downside. The order flow is in the calls, it’s substantially purchases and that flow is driving the price (vol) of the options up.

Note that MDR earnings are in Nov, not Oct and the stock has a history of gapping on earnings – so that earnings vol in Nov is valuable.

Finally, 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 the stock rise over the last two days and the corresponding vol increase... Yeah, vol increase with stock rise.

I wrote about this one for (OptionsProfits), so no specific trade analysis here. I will say that owning the Nov vol (with an earnings cycle) for less than the Oct vol seems like a reasonable position to analyze. I also like the idea of a diagonal, owning a lower strike call in Nov to a higher strike in Oct.

FULL DISCLOSURE: In fact, I put that trade on yesterday. But, today that spread costs more than the difference in the strikes (more than $1). Yesterday that trade costs me $0.75 – today, I actually closed. Today, obviously, I'm less enthused about an open...

This is trade analysis, not a recommendation.

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