Friday, June 8, 2012

Cobalt Int'l Energy (CIE) - Elevated Vol Sneaks in as Upside Becomes More Expensive

--- OVERVIEW ---
CIE is trading $22.57, down 0.7% with IV30™ down 0.4%. The LIVEVOL® Pro Summary is included below.


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Cobalt International Energy, Inc. is an independent, oil-focused exploration and production company with a salt prospect inventory in the deepwater of the United States Gulf of Mexico and offshore Angola and Gabon in West Africa. The Company’s prospects are focuses on oil.

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 vols.

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 CIE 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 a rather incredible rise over the last half year. In mid/late Dec, this stock was trading below $9.00. As of this writing, the stock is up more than 150% from that level and in mid Feb it was trading more than 275% above that level. I've highlighted the gap up on 2-10-2012 from $23.90 to $31.68 or 33% in a day. The news driving that move is included below:

Cobalt International Energy Inc. (NYSE: CIE) stock launched skyward Friday on news that a company offshore well in Angola is expected to produce 20,000 barrels a day, the Motley Fool reports.

The stock price hit a peak of $36.51 per share mid-morning, a gain of more than 50 [percent] from the $23.90 closing price on Feb. 9.

Source: Houston Business Journal via yahoo! Finance; Cobalt International stock soars on well news .

Although the stock chart doesn't really show it, there was some intense news (actually, allegations) surrounding this stock. I've included a rather large snippet from that summarizes it well as CIE refuted the attack.

54-16-2012: Cobalt International Energy responds to recent Financial Times articles: strongly refutes any allegations of wrong doing (28.38 )

Co, in responding to two articles published by the Financial Times on April 15, 2012, titled "Angola officials held hidden oil stakes" and "Spotlight falls on Cobalt's Angola partner," strongly refuted any allegations of wrong doing and once again stood behind its principles of full compliance with all laws in all jurisdictions in which it operates. Prior to publication of these articles, Cobalt went on the record asking for any documentation that the Financial Times could offer which was at odds with its position. The Financial Times declined Cobalt's repeated requests for supporting documentation. In fact, in the course of these communications, Cobalt informed the Financial Times of certain egregious, demonstrably false allegations that it provided to Cobalt. Cobalt began its investigation into its Angola business relationships in 2007. Cobalt has based its decisions and actions on the results of these extensive investigations and will continue to maintain rigorous due diligence in all of its worldwide activities. Cobalt remains confident that it has not violated any US or Angolan Law and will vigorously defend its reputation and legal rights in this matter.

Provided by (

That is at the very least, a vigorous refute. In any case, the stock has been drifting lower since the highs in mid-Feb.

On the vol side, we can see that the implied is in fact elevated to the two historical realized vols measures (and thus the scan trigger). Specifically:

IV30™: 97.23%
HV20™: 67.68%
HV180™: 87.65%

Although the 52 wk high in IV30™ is 112.38% (current IV30™ is in the 77th percentile (annual)), the level today is a high since late Dec (so nearly six months). Over the last month the stock has actually been moving with less realized vol -- HV30™ is 59.36%. The observation here is that as the stock has settled a bit and become less volatile in actuality, the implied vol (forward looking) is increasing to new several month highs. Hmm...

Let's turn to the Skew Tab to examine the month-to-month and line-by-line vols.

A couple of things are interesting here. First, we can see a slight elevation of the Jul vol to Oct (note the values on the vertical-axis. The difference isn't really that large). Second, note the upside skew in both the Jun and Jul term structure. The option market reflects greater upside risk (potential) than downside risk in the near-term. Again... Hmm...

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

Across the top we can see the vols by expiry with Jul priced to 97.23% -- about 7 percentage points higher than Oct (90.18%). Looking more carefully to Jul, we can see the ATM vol is priced to 97%, while the highest strike listed calls are priced to ~106%.

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