Thursday, November 17, 2011

Jefferies (JEF) - Despite CEO Outreach and Position Closes, Risk is Exploding

JEF is trading $9.80, down 5.0% with IV30™ up 35.5% as of ~11:25am EST. The LIVEVOL® Pro Summary is below.


Click for Free Trial


Jefferies Group, Inc. and its subsidiaries operate as securities and investment banking firm.

For those that don’t know, this stock became a headline grabber back on 11-1-2011 when concerns first over their MF (now defunct) and then European holdings came into question. The MF bugaboo was quickly resolved, but the European issue, not so much... Here’s a quick snippet from a Bloomberg article on that day:

[JEF] fell as much as 14 percent today as investors renewed their focus on Europe’s financial crisis, prompting the investment bank to say it has “no meaningful exposure” to debt issued by Portugal, Italy, Ireland, Greece and Spain.


Jefferies, which arranged $325 million of bonds for MF Global in August, said yesterday it has less than $9 million of exposure to the failed firm’s debt securities.

Source: Jefferies Slides as Investors Focus on Impact of Europe’s Sovereign Debt, written by Laura Marcinek

I actually wrote a post on 11-1-2011. You can read that one for more background. The link is here:
Jefferies Group (JEF) - Do We Know... Everything?

As of the writing of that article JEF was trading $12.47 with IV30™ up 38.3% to 72.52. And then...

People got more worried.. a lot... So, on 11-4-2011 JEF CEO came out and disclosed the company’s positions in Europe, reiterating a “net” postion of short $9 million. I wrote about that as well. You can read that background note here:
Jefferies (JEF) - Did the CEO Disclose... Anything? Isn't This What's Wrong With Wall St?

Since then, on 11-7-2011 JEF reduced the company exposure in Europe by 49.5%, closing $1.1 B in long and short positions. All is well right?... Well, today… JEF is trading in the single digits and IV30™ is over 125, so, let’s just say the market reflects risk.

Let’s start with the Charts Tab (6 mos), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

I’ve highlighted the vol pops – in the past and in the present. We can see that even before the MF news ‘n stuff, JEF stock wasn’t exactly a bastion of hope. Interesting how that has somehow been washed away… JEF was trading above $26 this year – even before the MF news it was down to $14. So, ya know, “stuff” wasn’t exactly awesome before this news.

Let’s turn to the Skew Tab.

I’ve only included the one and a half day Nov and the Dec options. Note the downside vol in the one (and a half) day options. The Nov 9 puts are priced at 183 vol; Nov 8 puts are priced at 241 vol. All that really reflects is the stickiness of those downside puts due to the potential of the “cataclysmic” news.

Finally, let’s turn to the Options Tab for completeness.

I wrote about this one for (OptionsProfits), so no specific trade analysis here. I will say that I have been on record stating that JEF isn’t really all that clear. Though the CEO has disclosed all positions (well done), the prior stock decline and newly realized risk simply won’t go away. I’ll give the CEO credit for staying calm in the public’s eyes simply stating:

“It is not surprising that our bonds are under pressure after the assault on our company over the past two weeks. Some bond investors sell first and ask questions later. We expect the market to return to normal pricing once we move beyond the ripple effect of the inaccuracies others have recently disseminated and once investors digest all the information.”
Source: Bloomberg: Jefferies CEO Sees Turmoil Easing Soon, written by Laura Marcinek

The market reflects tremendous risk –- and even more worrisome, increasing risk even after the disclosures. I do believe that the one day cataclysm isn’t happening tomorrow but I really wouldn't want to own the vega in Dec either and don’t particularly like being naked short downside puts in this name, even if for just one day. I mean, the cataclysm could be tomorrow, as the market does feel kinda shaky... like down limit shaky... no?

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:

No comments:

Post a Comment