Wednesday, November 16, 2011

Marathon Petroleum (MPC) - Oil Price Convergence, Dipping Stocks and Depressed Vol

MPC is trading $34.50, down 6.7% with IV30™ up 5.1% as of ~11:35am EST. The LIVEVOL® Pro Summary is below.


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Marathon Petroleum Corporation (Marathon Petroleum) is a petroleum product refiners, transporters and marketers in the United States.

The news driving the stock lower (and the vol higher) is simply the price of oil – it’s rising, a lot… Here’s a snippet from a MarketWatch article:

[T]he recent run-up in West Texas Intermediate crude from $75 a barrel just six weeks ago to $101 a barrel now has put pressure on refining margins. In recent action, futures for West Texas Intermediate Crude rose 2.5% to $101.85.
Source: MarketWatch

Adding abit to the drama, there is now a noticeable convergence between Brent Crude Oil and WTI (West Texas Intermediate Crude), when the two are normally trading with a steady spread betwen the two.

Let’s take a look at the Charts Tab (6months), 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 stock drop today. More interesting is the vol portion. Even with the vol pop today, the implied is trading below both the short-term and long-term historical realized vols. So, in a sense, the vol is depressed. Specifically:

IV30™: 56.74
HV20: 58.81
HV180: 64.28

I’ve marked two spots on the vol chart with yellow lines, those correspond to some specific strikes I want to examine. Let’s turn to the Skew Tab, below.

We can see the front is elevated to the back and that vol diff increases to the downside puts. The Nov 32.5 puts are priced at ~72 vol, while the Dec 32.5 puts are priced at ~58 vol. Those are the two levels I marked on the vol chart. Interestingly, that puts the Dec puts below the HV measures and the Nov puts above the HV measures.

Let’s finally turn to the Options Tab, for completeness.

I wrote about this one for (OptionsProfits), so no specific trade details here. Having said that, I like the idea of selling elevated vol and buying depressed vol to cover, but I don't like the idea of being too premium long given that this oil convergence between WTI and Brent Crude may be short-lived.

This is trade analysis, not a recommendation.

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