Friday, October 14, 2011

Southwestern Energy (SWN) - Upside Skew Explodes on Rumors, Earnings Vol Diff Opens

SWN is trading $37.98, up 0.9% with IV30™ up 13.7%. The LIVEVOL® Pro Summary is below.


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Southwestern Energy Company is an independent energy company engaged in natural gas and oil exploration, development and production (E&P).

This is an order flow note and an awesome example of skew reacting to order flow and rumors -- takeover rumors in this case. SWN has traded 31,014 contracts in the first two hours on total daily average option volume of just 6,336. Calls have traded on a 7:1 ratio to puts with the action in the OTM calls in Oct. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action -- check out the Oct 41 calls where over 6,500 have traded on existing OI of 8,038. That OI was ~ 1,000 as of three days ago. The existing interest looks long. Note that SWN has its next earnings report on 10-27-2011, which is after Oct expo. I've also highlighted the vols in the Oct OTM calls -- more on that below.

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

Well there you go. An incredible vol divergence to the upside between Oct and Nov. The upside calls in Oct spike in vol with each higher strike while the Nov OTM calls actually decrease with each higher strike. Picking a midpoint (ish), the vol diff between the Oct and Nov 43 calls is ~30 vol points while Nov has earnings. Whoa. It's also worth noting that those Oct OTM calls are real -- these aren't $0.03 calls. Even the Oct 45 calls are worth more than $0.30 to fair value.

I've included the Skew Tab from 9-23-2011 (exactly three weeks ago), below.

A stark difference between the skew three weeks ago and today. This is a perfect example of how order flow and news pushes option vol (and premium).

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).

I've highlighted a few things:
1. The abrupt stock drop in late Jul / early Aug.
2. The abrupt stock rise over the last ten calendar days.
3. While the IV30™ has been spiking with the stock rise it's actually just pacing the realized vol (HV20).

Possible Trades to Analyze
That upside vol diff is incredible, especially given the fact that the Nov options have a little vol protection (until 10-27-2011) with that earnings release. Diagonal to either side is an interesting position to examine. Diagonal to negative deltas protects against some of the premium outlay but risks an actual takeover. Diagonal to positive deltas risks that premium which might hurt if SWN drops and vol drops as well (which is possible).

This is trade analysis, not a recommendation.

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  1. wrong chart for the stock, yours shows 9 dollars. SWn is at 38. the theta decay on the novembers don't make it worth it. best to go further out to the december or jan on this one to specualate on the upside