Wednesday, April 11, 2012

RenRen (RENN) - Calendar Opens; Leaves Facebook IPO and Earnings in a "Depressed" Vol Cycle

RENN is trading $6.06, up 4.7% with IV30™ down 5.4%. The LIVEVOL® Pro Summary is below.


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Renren Inc. (Renren), formerly Oak Pacific Interative, incorporated in February 2006, is a social networking Internet platform in China. Renren generates revenues from online advertising and Internet value-added services (IVAS).

I found RENN on a real-time custom scan. This one hunts for calendar spreads between the second and third months. Add an earnings date in the back month and Facebook's IPO, and we have an interesting vol story.

Custom Scan Details
Stock Price GTE $5
Sigma2 - Sigma3 GTE 7
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 and LTE 50
Sigma2, Sigma3 GTE 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

The goal with this scan is to identify third months that are cheaper than the second month by at least 7 vol points. 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 front month vol simply because earnings are approaching.

Let's look to the Skew Tab.

We can see how May lies above Jul (in terms of vol). Both expiries show a similar shape -- sort of flattish through the middle. May does have some kinks to the OTM call side. RENN doesn't have a huge trading history, but the last four earnings cycles have been: 6-20-2011, 8-11-2011, 11-11-2011 and 3-8-2012. Basically, a reasonable guess could be that the next earnings cycle is outside of May and certainly within the Jul expiry. That means the elevated front is potentially ex-earnings while the back has the vol event. Tricky... But there's more...

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

The stock price has been rather volatile. I've highlighted the move between 1-26-2012 and 1-30-2012, when the stock moved from $4.16 to $6.31, or 51.7% in two trading days. The news from that time is included below:

Social media company Renren Inc (RENN). led a surge in Chinese Internet companies after a report that Facebook Inc. may file for an initial public offering next week.

Renren jumped 26 percent to $5.25 at the close in New York after the Wall Street Journal report, the most in more than eight months. Sina Corp (SINA)., which operates a service similar to Twitter, rose 12 percent to $69.96.

Source: Bloomberg via Yahoo! Finance -- Chinese Internet Companies Jump on WSJ Report of Facebook Initial Offering, written by Zachary Tracer - Jan 27, 2012 2:06 PM PT.

Perceived investor demand for this type of company (new social media) sort of spread across the industry off of Facebook's pricing, and since RENN and Facebook are pretty much equals, the move makes sense...

Finally, let's look to the Options Tab (below).

Look at the top of the tab -- May is priced to 102.61% while Jul is priced to 93.82%. The FB IPO is another potential vol event for RENN.  As of right now, FB hasn't decided between May 17th or May 24th for it's IPO. May expiry is Saturday May 19th. Right in the middle... how about that...

This is trade analysis, not a recommendation.

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