Monday, June 25, 2012

Assured Guaranty (AGO) - Elevated Vol in Mortgage Insurer

--- OVERVIEW ---
AGO is trading $12.00, down 2.2% with IV30™ up 3.5%. The LIVEVOL® Pro Summary is included below.


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Assured Guaranty Ltd. (AGL) is a Bermuda-based holding company. AGL provides through its subsidiaries, credit protection products to the United States and international public finance, infrastructure and structured finance markets. The securities insured by the Company include taxable and tax-exempt obligations issued by the United Sates state or municipal governmental authorities, utility districts or facilities; notes or bonds issued to finance international infrastructure projects; and asset-backed securities issued by special purpose entities AGL markets its credit protection products directly to issuers and underwriters of public finance, infrastructure and structured finance securities, as well as to investors in such debt obligations.

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.

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.

--- ANALYSIS ---
The AGO Charts Tab (six months) is included 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 the underlying was trading near $19 in mid-March, and is now down to $12 (down 37%). I've highlighted the one day gap down on 3-21-2012, when the stock closed at $16.30, down from $18.82 the prior day, or 15%. I've include a news snippet from that day, below:

What: Shares of bond insurer Assured Guaranty (NYSE: AGO) were getting hammered by the market today, falling as much as 17% in intraday trading after ratings agency Moody's (NYSE: MCO) put Assured's ratings on review for a possible cut.

Now what: Assured didn't take this announcement sitting down. In a press release following Moody's announcement, Assured vigorously defended itself, saying:

Assured Guaranty has not just, as Moody's writes, "survived" the financial crisis but has demonstrated its resiliency, resourcefulness and financial strength. While we have paid nearly $4 billion in claims since the onset of the mortgage crisis to protect investors from losses related to our insured residential mortgage-backed securities ("RMBS"), our claims-paying resources to protect policyholders have grown from $11.2 billion in 2007 to over $12.8 billion today.

Source: The Motley Fool via Yahoo! Finance; Assured Guaranty Shares Got Crushed: What You Need to Know, written by Matt Koppenheffer.

There was an interesting note written by MKM Partners on AGO six days after the Moody's warning essentially stating that it was the only of the guarantors to have survived the financial crisis in the sense that it continues to write new business. I found that snippet from (

In any case, the stock has continued to fall, even as some research firms have issued buy ratings based on valuation.

On the vol side, we can see that the implied has been rising of late and is well above both the short-term and long-term historical realized vols. Specifically:

IV30™: 58.89%
HV20™: 46.89%
HV180™: 48.87%

However, the implied is still "low" relative to its annual range of [33.64%, 105%], with the current value in the 34th percentile.

Let's turn to the Skew Tab, below.

Focusing on the 12 strike, we can see that vol rises monotonically to the front from the back. It is interesting to note that the vol in the OTM calls in Jul rise more quickly than the Aug OTM calls and that phenomenon has opened up a nice little calendar spread vol diff.

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

Across the top we can see the monthly vols are priced to 59.25%, 57.15% and 53.06%, for Jul, Aug and Oct, respectively. However, looking more directly at the vol diff in the OTM calls between Jul and Aug, we can see, for example, the Jul / Aug 14 call vol diff is ~6 vol points.

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