Monday, October 3, 2011

McDermott (MDR) - Rising Stock and Rising Vol; Earnings Approaching

MDR is trading $11.26, up 4.7% with IV30™ up 5.8%. The LIVEVOL® Pro Summary is below.


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

This is an order flow note. The company has traded over 15,000 contracts in the first two hours on total daily average option volume of just 2,753. Calls have traded on a 24.6:1 ratio to puts with the action in the Nov 10 and 14 calls -- substantially purchases IMO. The Stats Tab and Day's biggest trades snapshots are included (below).

The news driving this company is... well... I dunno... The stock dipped hard on Friday based on some revised outlook comments from a competitor. That news snippet is included below from a Forbes article:

Shares of Orion Marine Group (ORN) are plunging today after the heavy civil marine contractor updated its outlook late yesterday. Orion said during 2011, its end markets have experienced uncertain and tough times exacerbated by the inaction of the US Federal government to fund infrastructure programs such as a new highway bill and the Army Corps of Engineers budget.


Orion competes with companies like KBR and McDermott International.

Source: Orion Marine Group Shares Plunge on Outlook

The Options Tab (below) illustrates that both the Nov 10 and 14 calls are mostly opening (compare OI to trade size). With the vol up and most of the executions on the offer of at least dime wide markets, these look like purchases. When looking down the entire option chain for MDR, I only see one line with OI near 5,000, so both sides of these lines are very large for this company.

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

The skew shape is normal, with the downside strikes showing higher vol than the ATM and upside. The last two earnings cycles around this time for MDR have been 9-9-2011 and 9-8-2010 with prior cycles on or around 8-9. Given that MDR released earnings on 8-3-2011, it's reasonable to assume that the next earnings cycle will be in the Nov options expo cycle (and outside of Oct). Right now we can see the two months essentially lie on top of each other in terms of vol, so, ya know...

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 massive stock drop on 8-4-2011. Here's a quick summary of that move from The Motley Fool:

What: Shares of oil and gas infrastructure service provider McDermott International (NYSE: MDR ) fell nearly 27% after reporting lower-than-expected profits.

So what: Revenue rose 35% to $849.8 million, beating estimates, but a 30% decline in Middle East sales took a toll on profits. Earnings came in at $0.27 a share, a sharp decline from last year's $0.34 and five cents below analysts' consensus projection.

Source: McDermott International Shares Plunged: What You Need to Know, written by Tim Beyers.

Interesting that the vol is up today again though the stock is rising.

Possible Trades to Analyze
The vol in Nov (earnings) isn't elevated to Oct, which at first blush is pretty weird given that the stock dropped almost 30% on the last earnings cycle. But, check out this stat:

IV30™ was just 48.28 before the last earnings cycle and actually rose to slightly over 60 after the release (as a result of the stock drop). As of right now, both Oct and Nov are priced at slightly over 80 vol. If looking to that non-existent vol diff between Oct (non-earnings) and Nov (earnings), it feels like Oct might be more elevated than Nov is depressed. i.e. owning vega on 80 (ish) vol is... ya know... high (ish), no? Just sayin'...

This is trade analysis, not a recommendation.

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