Wednesday, January 4, 2012

Computer Sciences (CSC) - Elevated Vol, Bad News and Allergic IV30&#8482

CSC is trading $24.26, down 1.1% with IV30™ up 11.3%. The LIVEVOL® Pro Summary is included below.


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Computer Sciences Corporation (CSC) is engaged in the information technology (IT) and professional services industry.

I found this stock using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol. I've included the scan details below, but this one has a little extra pattern to it which I like.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

The CSC Charts Tab is included (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 elevated implied to the two historical realized vols. While the vol is popping today (more on that below), we can see that it's been much higher as recently as early Dec.

The stock has been headed down -- its annual high is $55.28 and as of this writing it's trading at $24.26. The news for CSC lately has been... well it's been the kind of news you would expect from a stock that was $55 and is now $24. I've included a couple of snippets below from the last two days.

Tuesday, January 3, 2012

Fitch Ratings has put its ratings on Computer Sciences Corp on Negative Watch, citing uncertainties over its health information contract with the U.K.’s National Health Service.

Last week, Standard & Poor’s cut its long-term ratings on CSC by one notch for the same reason.

CSC last week warned it may write off as much as $1.5 billion in contract investments connected to the NHS contract, and said it would revise its 2012 forecast as a result.
Source: Washington Business Journal via Yahoo! Finance: Fitch puts CSC on watch list, written by Jeff Clabaugh.

And today CSC was mentioned in an article entitled, J.P. Morgan: Avoid these 11 stocks, written by Meena Krishnamsetty. That's probably not a good article to be listed in... just sayin'...

The specific vol comp levels that triggered the custom scan are:

IV30™: 66.33%
HV20™: 52.93%
HV180™: 52.98%

The 52 wk range in IV30™ for CSC is [25.56%, 95.26%], so that 66.33% level, while certainly elevated, is still only in the 58th percentile (annual).  It's also worth noting that CSC IV30™ seems to have an allergic reaction to the HV180. By that I mean, every time it gets near that level (pink line), it pops above it pretty soon after.

Let's turn to the Skew Tab, below.

The skew has maintained a "normal" shape. To read what "normal" skew is and why it exists you can go here: Understanding Option Skew. Feb is elevated to Jan and Mar b/c of the next earnings release which is due out around Feb 10 (ish) based on the prior two years which saw 2-10-2010 and 2-9-2011 earnings reports. One interesting point, that Jan 20 put vol is super elevated and is in fact higher than the Feb 20 puts.

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

While I didn't include it in the skew chart, we can see that the jun option cycle is actually priced to 54 vol -- so a significant discount to the front months. CSC usually has earning sin early Feb and late May, meaning that those Jun options have two earnings cycles embedded.

DISCLOSURE: I own puts in CSC from a calendar spread where the front expired worthless.

This is trade analysis, not a recommendation.

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