Tuesday, January 3, 2012

Barnes & Noble (BKS) - Elevated Jan Vol Reflects Upside and Downside Near-term Potential

BKS is trading $15.00, up 3.6% with IV30™ down 3.7%. The LIVEVOL® Pro Summary is below.


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Barnes & Noble, Inc. (Barnes & Noble) is a bookseller. The Company is a content, commerce and technology company that provides customers access to books, magazines, newspapers and other content across its multi-channel distribution platform. As of April 30, 2011, it operated 1,341 bookstores in 50 states, 636 bookstores on college campuses, and one a Web eCommerce sites, which includes the development of digital content products and software.

This is a vol note -- both month-to-month and skew. A good start to 2012. Let's begin 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 a precipitous drop from the $18 level all the way down to a close under $10 in a month (ish). Then in early/mid Nov the stock popped from the $11 range to over $18. Let's look at some of the news that drove these moves:

First, the ugliness that was mid August 2011 summarized by The Motely Fool:
What: Shares of Barnes & Noble (NYSE: BKS ) sank 15% in intraday trading Friday on news that Liberty Media will make a $204 million strategic investment in the beleaguered book retailer.

So what: That kind of commitment would usually be a huge positive for shareholders, but it also means that Liberty's previous $17-per-share takeover bid is now off the table. Of course, given that rumors about Liberty's change of heart were already floating around (the shares are now down 40% in August alone), today's news isn't that big of a surprise to Mr. Market.

Source: Fool.com via Yahoo! Finance: Barnes & Noble Shares Plunged: What You Need to Know, written by Brian D. Pacampara

And, the news that saw the stock recover in early Nov surrounded the Nook -- the BKS answer to AMZN's kindle and AAPL's iPad (sort of). CNBC highlighted the Nook as a "serious rival" to the Kindle line according an article posted on The Motely Fool, written by Anders Bylund.
Source: Barnes & Noble's Shares Surged: What You Need to Know

So there you go. A failed takeover but with investment and some hype (not meant in a derogatory way) over a new product line.

Turning to the vol portion of the chart, we can the implied has hovered around the long-term HV180 and is now essentially perfectly in line with that long-term historical realized trend.

Let's turn to the Skew Tab and we'll see a number of phenomena with the vol.

Here's what caught my eye:

1. There's a monotonic increase in vol from the back to the front across the front three expiries. The next earnings release for BKS should be near the end of Feb -- so in the Apr options, but not necessarily in Feb and certainly not in Jan. Hmmm...

2. The front two expiries show a parabolic skew reflecting both upside and downside risk, but the earnings expiry does not show that same shape.

3. Most notably to me, the Jan vol is substantially elevated to Feb and the upside skew vol diff is quite large (highlighted).

Finally, let's turn tot the Options Tab to see the specific vol numbers.

We can see the vols from Jan to Feb to Apr are 89 to 79 to 76, respectively. Further, the upside calls in Jan are priced to ~17 vol points higher than Feb. The option market reflects substantial near-term risk in BKS -- both downside instability and upside potential. This risk does not seem to surround earnings, though. That's interesting b/c for the last two earnings cycles BKS has moved 15% and -16% on 8-30-2011 and 12-1-2011, respectively. In English, earnings reports have provided significant moves in the stock price.

This is trade analysis, not a recommendation.

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