Thursday, August 16, 2012

Electronic Arts (EA) - Vol and Stock Pop on Private Equity Rumor; Calls Trading; Skew Bends

EA is trading $13.74, up 5.0% with IV30™ up 26.6%. The LIVEVOL® Pro Summary is below.


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Electronic Arts Inc. develops, markets, publishes and distributes game software content and services that can be played by consumers on a variety of video game machines and electronic devices (platforms).

This is a vol and order flow note very much like the one I posted yesterday on HUN. The news is a rumor of a private equity firm's interest in taking the company over. However, CNBC also reported that the rumored firm has explicitly denied the claim. You can read the post from yesterday with similar order flow and vol movement, here:
Huntsman (HUN) - Vol Explodes, Skew Shifts Dramatically on Call Purchases... But, Why?

Let's start with the order flow for EA today. The company has traded nearly 75,000 contracts on total daily average option volume of just 5,424. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. We can see that over 20,000 Sep 16 calls have traded and nearly 10,000 Sep 15 calls have also traded. The Sep 15's look like purchases, while the Sep 16's are more ambiguous b/c of that one large print sent back by the exchange with an NBBO that's outside the execution price. My best guess is that that was a call purchase, likely done with stock. When looking down the entire option chain for EA, I don't see any OI larger than ~8,000, so both the Sep 15 and Sep 16 call interest if one-sided is very large.

The Skew Tab snap (below) illustrates the vols by strike by month.

Here's where it gets really interesting. We can see two things today which we didn't see yesterday. First, I've included the Skew Tab from yesterday below, then some commentary.

Two stark differences:
1. The front month (red) is substantially higher today than it was yesterday. In fact, the Aug options went from priced below the back two months (in terms of vol), to above. The change in Aug IV today is +30.5 vol points to 66.42%, or nearly a doubling overnight.

2. While the Sep and Dec ATM options remain about evenly priced (in terms of vol), the upside in Sep is now substantially elevated to Dec, exhibiting a reverse skew (vol rising to the OTM calls). As I said yesterday (and several times prior), this is my favorite part of option trading -- watching the price discovery evolve in the volatilities by month, by strike as news comes out. In English, the near-term upside risk (potential) as reflected by the option market is substantially higher in Sep then Dec.

To read more about Option Skew, you can check out this post:
Understanding Option Skew -- What it is and Why it Exists .

Finally, the Charts Tab (six months) is 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 pop today, as well as the nice recovery over the last month (is). Up until the end of July, this stock had been on an essentially straight line downward path over the last half year. The 52 wk range in stock price is [$10.77, $26.13].

On the vol side we can see the pop in the implied today -- rather substantial. The 52 wk range in IV30™ is [33.66%,63.17%], putting the current value in the 35th percentile.

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This is trade analysis, not a recommendation.

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