Thursday, January 12, 2012

Williams-Sonoma (WSM) - Stock Plummets But Options Reflect Low Risk, Puts Sold

WSM is trading $34.16, down 12.16% with IV30™ down 15.9%. The LIVEVOL® Pro Summary is below.


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Williams-Sonoma, Inc. is a specialty retailer of products for the home. The Company has two segments: direct-to-customer and retail.

The stock is down hard to day on some outlook. I've included a snippet from a MarketWatch article, below:

CHICAGO (MarketWatch) -- Williams-Sonoma Inc. shares fell 13% Thursday after the home-furnishing retailer trimmed its fourth-quarter and full-year forecasts, due to higher marketing costs over the holiday season.

Source: MarketWatch via Yahoo!Finance Williams-Sonoma plunges 13% on outlook, written by David B. Wilkerson.

It's interesting that the vol is down. That type of vol behavior is normally a reflection of a news event that was expected and has now happened (like an earnings release). In English, it feels like the announcement (good or bad) was expected to occur. Before we look at some vol comps 'n stuff 'n stuff, let's turn to the order flow and see how it has been the impetus for the vol decline.

The company has traded over 13,500 contracts on total daily average option volume of just 766. Puts have traded on a 4.5:1 ratio to calls. The action has been in the Feb 33 puts, were over 5,100 have traded. Those look like sales (substantially) as do the Feb 32 puts which have traded over 2,000 times.  Traders are selling vol in WSM.  The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the puts in Feb are mostly opening (compare OI to trade size). The largest OI  that I see in the near the money options in the front three months is the Jan 38 calls (5,064), so the volume in the Feb 33 puts is quite large for this company.

The Skew Tab snap (below) illustrates the vols by strike by month.

One of the more interesting skews I've seen in a while. First, we can see that the front ATM vol is in between the second and third expiries, which in and of itself is not note worthy. But, the shape of the Jan skew is the opposite of "normal." The upside is bid, super bid actually, with the OTM calls more expensive than the strikes below them all the way down to the ATM.  The second and third expiries, however, show a normal shaped skew, with OTM put vol more expensive than the calls (and ATM).

In English, the front month reflects upside potential over downside risk. The second month doesn't, but the order flow has been to sell that downside -- in a sense, trading as though the second month should be priced like the first, with downside vol depressed. Tricky...

To read about skew, why it exists and what "normal" means, you can go here:
Understanding Option Skew

Finally, the Charts Tab (one year) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

This Chart is interesting for a couple of reasons.

1. The stock has seen a lower price (substantially lower) in the relatively near-term. On 10-4-2011, the stock hit the $28.53 level (intraday). So what?  Well, with bad news today, the order flow has been to sell the downside and to price the near-term upside more expensively yet, again, the stock has been lower very recently.  Weird...

2. The vol dip today is quite notable. Why? Because the current IV30™ level is right on top of an annual low (which is 29.04%). The IV30™  is at (or around) the 5 percentile level (annual).

It's astonishing to me how the market is digesting this bad news for WSM. It's abrupt with respect to stock, but the vol behavior reflects significantly lessened risk moving forward - very much like a full earnings report.  Very cool and kinda weird.

This is trade analysis, not a recommendation.

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