Wednesday, November 30, 2011

Lorillard (LO) - Elevated Vol Trend, Time Spread Opens to Puts

LO is trading $110.67, up 2.0% with IV30™ down 2.1% as of ~10:30am EST. The LIVEVOL® Pro Summary is below.


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Lorillard, Inc. (Lorillard) is the manufacturer of cigarettes in the United States.

I noticed LO for a couple of reasons – both vol related. The first is the tendency for the implied to trade above both the short- and long-term historical realized vols. It’s sort of a front spreaders dream. Let’s start with the Charts Tab (6 months), below. The top portion is the stock price, the bottom is the vol (IV30™- red vs HV20 - blue vs HV180 - pink).

On the stock side we can see that several months ago the stock did move with a lot of volatility. From 5-31-2011 to 6-7-2011 the stock went from $115.28 down to $97.20. Then on 6-14-2011, the stock popped ~$13 back up to $113.59. But, it’s the last two months that have begun (and maintained) the elevated trend. Since 9-22-2011, the IV30™ has traded above the historical vols (HV20 and HV180) and that vol diff is now at its peak (relative to HV20). Specifically:

IV30™: 45.25
HV20: 17.27
HV180: 31.37

The second vol related phenomenon I noticed in LO relates to the skew and vol term structure. Let’s look to the Skew Tab, below.

We can see that the front three months have monotonic increases in vol from the back to the front expirations, while the skew shapes are the same (and “normal”). The next earnings release for LO should be in the first or second week of Feb, so the Mar options have that vol event embedded in them. Oddly, the Mar options show the lowest vol of the three front expirations (though it is elevated to Jun).

The vol opens up the furthest in the downside puts, as Dec downside is pretty bid.

Let’s turn to the Options for completeness.

I wrote about this one for (OptionsProfits), so no specific trade analysis here. I will note that the 52 wk range for LO stock price is [$68.76, $118.57], so it’s much closer to an annual high than an annual low. The 52 wk range in IV30™ is [20.30%, 68.43%], so it’s sorta middle(ish) sitting in the 53rd percentile. Not to overwhelm with numbers, but the HV20 percentile is just 28%, or in English, the stock's recent "low realized vol" is a bit on the low side relative to its past -- so it might start moving some more soon. The option market certainly reflects elevated risk.

This is trade analysis, not a recommendation.

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