Wednesday, June 6, 2012

Tempur Pedic Int'l (TPX) - Stock Collapses, Vol Explodes on Guidance

TPX is trading $22.63, down 48.2% with IV30™ up 25.6%. The LIVEVOL® Pro Summary is included below.


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Tempur-Pedic International Inc. (Tempur-Pedic International), incorporated in September 2002, is a manufacturer, marketer and distributor of premium mattresses and pillows, which it sells in approximately 80 countries under the TEMPUR and Tempur-Pedic brands. The Company operates in two segments: North America and International.

First, the news driving the stock down nearly 50% (it's earnings / guidance based):

NEW YORK (AP) -- Shares of mattress makers plunged Wednesday, after Tempur-Pedic projected a second-quarter profit that was less than half the size of what Wall Street expected, blaming a drop in North American sales and spooking investors across the sector.

Tempur-Pedic International Inc., which focuses on pricey mattress models, said it expects its profit to fall about 50 percent from the one it posted in the second quarter of 2011. That implies a profit of about 38 cents per share, while analysts polled by FactSet expected a profit of 86 cents per share.

Source: AP via Yahoo! Finance; Sector Snap: Mattress companies take a fall

I actually found TPX 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.

The TPX 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).

Though it seems unbelievable, this stock closed at $87.26 on 4-18-2012 -- that same day it hit an annual high of $87.43. Two days later the stock closed at $70.32 after an earnings release. Three weeks after that it closed in the $46 range. Today it's trading at $22.63 (as of this writing), which is more than 74% lower than than it's high in mid April. Ouch...

On the vol side, we can see that the implied began to rise in late Apr / early May, but has spiked today off of the guidance. The vol rise is noteworthy in that the option market reflects greater uncertainty with this disclosure, not less. One could argue that with the earnings report in Apr and the disclosure today, there is more certainty (granted it's of bad news) than there was before today's news. That argument would be in contrast to what the option market reflects. The level of IV30™ today is right on a new annual high (just over 76% in Oct 2011). When looking at the historical realized vols, keep in mind that they are calculated close-to-close, so that blue line for HV20™ will pop tomorrow.

Let's turn to the Skew Tab, below.

We can see how elevated Jun is to Jul and Sep. The risk reflected by the option market is most elevated in the near-term; like one and a half weeks. The spiky shape is simply a reflection of the wide markets -- for example, the Jun 26 calls are $0.50 wide in an option worth $0.50 (using mid-market). Similarly, the Jun 21 puts are $0.60 wide but worth just $0.65 to mid-market.

For a relative comparison, or better said, to see what effect the news today has had on skew, I've included the Skew Tab from yesterday, below.

Notice how smooth the shape is, how the ATM vol levels are very close to each other and how the OTM puts are priced to higher vol than ATM vol and OTM calls (that's "normal"). The skew shape today shows elevated vol in the OTM calls -- a common occurrence after an abrupt move down (reflects risk of a snap back recovery).

To read about what normal skew is and why it exists, you can read this post: Understanding Option Skew -- What it is and Why it Exists

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

Across the top we can see the monthly vols are 90.83%, 75.55% and 73.61% for Jun, Jul and Sep. respectively. Keeping in mind that the annual high in IV30™ is ~76%, that 90% level is quite high for TPX.

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1 comment:

  1. this is what is looks like when institutional holders start selling a stock