Thursday, March 15, 2012

Lions Gate Entertainment (LGF) - How a Movie Release Looks Like a Bio-tech Decision

LGF is trading $13.43, down small with IV30™ up 1.2% as of ~10:15am EST. The LIVEVOL® Pro Summary is below.


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Lions Gate Entertainment Corp. is a global entertainment company with a diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, family entertainment, digital distribution and new channel platforms.

This is a vol note with news embedded in the company. I actually wrote about LGF on 2-29-2012 where I noted elevated vol and a calendar vol diff. There was some news powering the vol movement. Here’s a snippet I used in the prior post:

Lions Gate Entertainment Corp. says it reduced its loss in the quarter as it cut expenses. Revenue fell because it didn't have any movies in wide release in theaters. The movie studio acquired "Twilight" maker Summit Entertainment last month and has the first "Hunger Games" movie out in theaters next month.

Source: AP via Yahoo! Finance -- What earnings reports reveal about entertainment

But the real news now is the release of the highly anticipated “Hunger Games” film. This event (the release and money it produces) pushes vol (risk) and makes an entertainment firm look similar to a bio-tech.  Let’s turn to the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

I believe the term I used last time for the stock movement was “awesome.” I still think the adjective holds – this was a $6.50 stock less than six months ago. On the vol side we can see a rising implied as the stock has been range bound – this is common behavior of an underlying with impending news. The vol comps specifically, are:

IV30™: 65.08%
HV20™: 41.95%
HV180™: 38.23%

Let’s turn to the Skew Tab to examine the vols with greater granularity.

This is a gorgeous representation of the embedded news. The front is substantially elevated to the second month, which is in turn elevated to the third expiry. Further, while the back two expiries show downward sloping skews (normal) , the front shows two-sided tail risk with the OTM calls also more expensive (in terms of vol) than the ATM options. In English, the option market reflects both near-term downside risk and upside potential with the news to decide which direction (probably).  This is what a bio-tech looks like with a pending FDA decision or test result.  The major difference, of course, is the absolute value of the vols -- we're looking at 65% (ish) -- bio-techs can get in the 500% range.

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

I wrote about this one for TheStreet (OptionsProfits), so no specific trade analysis here. The rumors for Hunger Games have been good in terms of expected revenue. That means in order for LGF to go higher, the results will have to be even better than the expectations – that’s how stock prices work. We can see that Apr is priced to 65.08% vol while Jun and Sep are priced to 55.03% and 49.32%, respectively.

This is trade analysis, not a recommendation.

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