Monday, June 4, 2012

United Rentals (URI) - Darling Stock Dropping Hard, Vol Exploding, Calendar Diff Opens

--- OVERVIEW ---
URI is trading $29.63, down 4.8% with IV30™ up 5.5%. The LIVEVOL® Pro Summary is below.

United Rentals, Inc. (United Rentals) is principally a holding company. The Company primarily conducts its operations through its wholly owned subsidiary, United Rentals (North America), Inc., and its subsidiaries. The Company is an equipment rental company. It operates in two segments: general rentals and trench safety, power and HVAC.

This is a vol note on a dipping stock. As the implied has risen, an interesting vol diff has opened up month-to-month as well.

--- ANALYSIS ---
Let's start with the Charts Tab (6 months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

There's actually a lot going on here. Starting with the stock portion, we can see the gap up off of earnings on 4-18-2012 (earnings were reported 4-17-2012 AMC). The stock popped from $40.91 to $45.75 (11.8%) in one day close-to-close. But, after a rise over the next few trading days, the stock has plummeted. On 4-27-2012 the stock reached as high as $47.98 (an annual high). As of this writing, the stock is down to $29.63, or 38% lower than the high reached a little over a month ago. Incredibly, the 52 wk range in URI is [$12.81, $47.98], so the stock has seen much lower lows.

I've included a news snippet that highlighted the drop in mid March, below. The rest of the drop seems to be market related -- that is, I can't find any really interesting firm specific news.

Bulls keep the faith in United Rentals, via Yahoo! Finance.
By David Russell ( | optionMONSTER – Fri, May 18, 2012 3:22 AM EDT

The equipment-rental company's stock tripled between early October and late April amid a steady flow of bullish earnings reports. But it's been getting dumped in the last month as weakness in the broader market causes investors to liquidate winning positions.

Yesterday URI fell 11 percent to $33.89. It has lost more than one-quarter of its value from its all-time high of $47.98 on April 27.

As the stock has collapsed, the vol has popped quite significantly. On 5-2-2012, IV30™ closed at 35.90%. As of this writing, IV30™ is now 84.25%. That's a 135% rise in a month with earnings long gone. The 52 wk range in IV30™ is [35.42%, 101.52%].

The vol rise has turned into a vol difference between the front month and the back. Let's turn to the Skew Tab to examine the calendar vol diff.

We can see two distinct phenomena in the skew chart:

1. The front vol is elevated to the back and in fact that relationship is monotonic across the front three expiries.

2. The front OTM calls do show a slight upward bend in skew -- that is, the OTM calls show "backward skew" reflecting greater upside risk (potential) in the near-term than in the later months. You can read about skew, what it is and why it exists here: Understanding Option Skew -- What it is and Why it Exists

Keep in mind that the last two earnings cycles for URI in Summer have been 7-20-2010 and 7-19-2011. The last trading day for the Jul option cycle is 7-20-2012, meaning that there could be an earnings cycle embedded in the Jul options that is not in Jun while the vol is depressed in Jul to Jun. Tricky...

--- SUMMARY ---
Finally, let's turn to the Options Tab for completeness.

We can see (across the top) that Jun vol is priced to 100.71%, while Jul and Sep are priced to 84.25% and 74.03%, respectively. In English, we're looking at more than a 16% vol diff between the front and the second months while there is a distinct possibility that the depressed Jul options contain a vol event (earnings). I also note that the Jun 22 puts are priced to nearly 116% vol and are worth ~$0.20 (using mid-market).

This is trade analysis, not a recommendation.

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