Monday, October 17, 2011

Research in Motion (RIMM) - Elevated Vol, Parabolic Skew

RIMM is trading $22.75, down 5.1% with IV30™ up 0.7%. The LIVEVOL® Pro Summary is included below.


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Research In Motion Limited (RIM) is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market.

This is a vol note, but keep in mind, at it's annual high RIMM was a $70 stock. I found it today using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated 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 selling elevated IV30™ simply because earnings are approaching.

The RIMM 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).

I've highlighted three stock gaps down. The two most recent were a direct reaction to earnings releases. The last one pushed HV20 up well beyond the IV30™, but has just rolled off that moving average. Now the implied is trading well above both the short-term and long-term historical realised measures (HV20 and HV180).

We can see:
IV30™: 80.52
HV20: 65.04
HV180: 64.89

Let's turn to the Skew Tab, below, to examine the month-to-month term structure and line-by-line vols.

We can see the ATM vols for Oct and Nov are the same -- it's the OTM options that show a parabolic skew in Oct (which is normal this close to expo).

Let's look to the Options Tab (below) for completeness.

Note how close Oct and Nov ATM vol are priced.

Possible Trades to Analyze
A short-term position to analyze could be selling the front month vol. Covering with the wings is a possibility, but then again, that purchases the most elevated vol on that skew chart. A longer-term position to analyze could be the Nov vol sale and covering with Nov wings.

Alternatively, owning the RIMM vol could be an interesting position to examine given the retail driven months ahead. Perhaps selling the Oct wings to fund a part of the Nov vol is worth examining. Given RIMM's 52 wk low of $19.29, perhaps a ratio sale is worth analyzing as well.

This is trade analysis, not a recommendation.

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