Wednesday, December 28, 2011

Morgan Stanley (MS) - Depressed Vol into Ambiguous Earnings Date

MS is trading $15.22, down 0.5% with IV30™ up 0.2% as of ~10:20am EST. The LIVEVOL® Pro Summary is included below.


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Morgan Stanley is a global financial services firm that, through its subsidiaries and affiliates, provides its products and services to a group of clients and customers, including corporations, governments, financial institutions and individuals.

This is a vol note surrounding an upcoming earnings report. Specifically, I’m interested in examining some depressed vol for MS. Let’s start with the Charts Tab (one year), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

We can see that MS is actually down ~50% from its annual high in mid Feb. On the vol side, we can see that the implied has spiked and stayed elevated relative to the earlier part of the year since early Aug. Relative to that spike in August, the vol comps today actually point to depressed vol. So, to convolute things, I’m examining depressed-elevated vol. Specifically we can see today:

IV30™: 56.43
HV20: 78.22
HV180: 68.24

That IV30™ level is the lowest it has been since 10-28-2011. The 52 wk range in IV30™ though is [22.87%, 128.59%], which is an incredibly wide range. A linear interpolation puts the current IV30™ level at the 32nd percentile.

For the last two years MS has reported earnings on 1-20-2010 and 1-20-2011 with prior earnings dates of 10-21-2009 and 10-20-2010. Last cycle, MS released earnings on 10-19-2011. All of this date parsing becomes interesting because Jan expiry is 1-20-2012. So, in English, there’s an earnings report (a volatility event) coming either in the last few days of the Jan options cycle or the first few days of the Feb cycle.

Let's turn to the Skew Tab to examine month-to-month vols.

The phenomenon that grabs my attention here is that all three months show nearly identical ATM vol. Usually, a rather noticeable separation exists between the earnings month and the others. The ambiguity as to the earnings date may be the culprit here, but either way, the implied is depressed relative to the two historical measures across all three front expiries.

Let's turn to the Options tab for completeness.

I wrote about this one for (OptionsProfits), so no specific trade analysis here. But, we can see at the top of the Options Tab that the Jan, Feb and Apr options are priced to 56.03, 57.06 and 58.28 vol, respectively. The depressed implied in MS combined with the earnings report / vol event make a compelling case for vega analysis. Countering the "cheap" vega argument is the IV30™ level of MS last Jan, which was in the low 30's.

This is trade analysis, not a recommendation.

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