Tuesday, July 17, 2012

Focus Media (FMCN) - Chinese Media Vol Rises With Stock Drop; Immediate-tem Risk Elevated

FMCN is trading $17.84, down 4.8% with IV30™ up 9.0%. The LIVEVOL® Pro Summary is below.


Click for Free Trial


Focus Media Holding Limited (Focus Media) is a multi-platform digital media company, operating liquid crystal display (LCD) display network in the People’s Republic of China using audiovisual digital displays in commercial and residential locations.

I wrote about FMCN just eleven days ago and noted the depressed vol in what appeared to be a "risky" stock in that it had substantial firm-specific and systematic risk. You can read the older post here:
Focus Media (FMCN) - Gapping Chinese Stock with Multi-layered Risk Shows Depressed Vol...?... .

I've included the Symbol Summary from that day, below. Note the vol and stock changes today from the Summary below (just eleven days ago):

Today I note the calendar vol diff that has opened up in FMCN between this expiry (with just four days to go) and the back months to coincide with the recent vol run up and stock decline. Let's turn to the Charts Tab, first, then look to the Skew. 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 drop of late. The troubling thing is that I don't really see any news on the firm during this downtrend. Nonetheless, the stock is now at a six month low. Not shown on this chart (but still relevant), is the massive decline seen on 11-21-2011, when the stock dropped from $25.50 to $15.43 or down 39.5%. Even more "scary" was the low reached on that day of $8.79 (a 65.5% drop). That cataclysm was based on a Muddy Waters report. Here's a news snippet from that day:

Focus Media halted after plunging 62% following Muddy Waters report (9.57 -15.92) -Update

Source: Provided by Briefing.com (www.briefing.com)

On the vol side, we can see that the implied has been rising in lock step with the stock decline. IV30™ has risen from 51.12% to 75.93% or a 48.5% increase in just the eleven days since the first blog post. Even with this rise, the implied is below the long-term historical realized vol and is in the 24th percentile on an annual measure. In English, while the vol is up a lot of late, it's been much higher this year and is still well below the long-term historical realized movement of the stock.

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

Now we an see how elevated the front expiry is relative to the back. While there are only four trading days left until expiration, the vol level in the Jul options does present some non-trivial option premiums. The option market reflects substantially elevated risk in the very near-term -- and the recent stock drop proves the relevancy of that measure.

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

Across the top we can see the monthly vols are priced to 90.63%, 75.93% and 71.24% for Jul, Aug and Oct, respectively. In terms of vol differences, note that the Aug/Jul 17 put spread and Aug/Jul 19 call spread show 20 point and 15 point vol spreads, respectively.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

This is trade analysis, not a recommendation.

Legal Stuff: