Thursday, September 6, 2012

Electronic Arts (EA) - Calendar Vol Diff Opens; But What About Earnings?

EA is trading $13.60, up 3.5% with IV30™ down 2.9%. The Fidelity Symbol Summary is included 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 quick vol note, specifically a calendar spread I noticed – but with a twist. The back month has earnings (a vol event) embedded in the options.

Let’s start with the Skew Tab from today to examine the line-by-line and month-to-month vols.

Note that I have excluded the Sep options and am only focusing on the Oct and Dec expiries. We can see that the ATM vols (13 and 14 strikes) are depressed in Oct relative to Dec. But, as we walk further up the skew, we can see that the OTM calls in Oct are in fact priced higher than the OTM calls in Dec (in terms of vol). The tricky thing here is that the next earnings release for EA should be in the end of Oct but outside of Oct expiry. In English, the Dec options have a vol event that Oct does not, yet the OTM calls in Dec are less expensive (in terms of vol) than the OTM calls in Oct. And that, is a fancy little trick.

I took a look back at the historical skew for EA and as late as 8-27-2012, the skew shape did not exhibit this phenomenon. I have included that Skew Tab, below.

While there’s a hint of higher vol in the 17 strike, for the most part, all of Oct lies below Dec – which is expected given the earnings event.

Let’s turn to the Charts Tab (six months), 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 how EA was in a bit of a free fall for the four months ending in late July. Since hitting a closing low of $11.02 on 7-31-2012, the stock is up 23.4% as of this writing – so a nice rebound.

On the vol side we can see how the implied rises and falls with earnings, which is normal. But more recently we can see that spike in the IV30™ and then a bit of a dip. On 8-24-2012 the implied closed at 38.16% and rose to as high as 53.59% (a 40% rise) one week later. The IV30™ has dipped since then to 47.62%, but it’s still elevated to that 8-24-2012 level and is certainly elevated to the historical realized measures (HV20™ and HV180™. The 52 wk range in IV30™ for EA is [33.66%, 63.17%], putting the current level in the 47th percentile.

Finally, let’s turn to the options Tab for completeness.

Across the top we can see that Oct vol is priced to 46.37% while Dec is priced to 47.22%. But, as we saw in the skew chart, moving to the OTM calls, we can see that the vol in Oct is above Dec. In fact, that same phenomenon exists in Sep . As just one example, we can see on the 17 strike vols of 69.94%, 52.15% and 44.75%, respectively for Sep, Oct and Dec. An interesting position to analyze would be the Sep/Dec OTM call spread, then if Sep expires worthless, to roll that into an Oct/Dec call spread, all the while owning cheaper vol than selling while owning the earnings event. Just to be clear, I’m not recommending this trade, I’m pointing out a cool vol phenomenon, namely OTM call elevated vol outside of earnings relative to an expiry with earnings.

This is trade analysis, not a recommendation.

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