Friday, September 14, 2012

Tyson Foods (TSN) - Drought Pushes Prices Higher; Order Flow Shifts Skew into Price Discovery Mode

TSN is trading $16.43, up 0.5% with IV30™ up 11.4%. The LIVEVOL® Pro Summary is below.


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Tyson Foods, Inc. is a meat protein and food production company. The Company produces, distributes and markets chicken, beef, pork, prepared foods and related allied products. Its operations are conducted in four segments: Chicken, Beef, Pork and Prepared Foods.

This is a vol and order flow note with some very interesting skew and price discovery. To set the stage, I'll actually start with some news snippets, then move into the analysis. From what I can tell, this article from The Motley Fool does a good job of summarizing the difficult position TSN (and others) is in due to the worst American drought in 50 years.

Cashing in on America's love for chicken wings is the company Buffalo Wild Wings (NASDAQ: BWLD). Buffalo Wild has other things on their menu, but as their name suggests, the buffalo wings are the specialty of the house [...]

[...] spikes in revenue coincide with football season.

Currently, the United States is experiencing the worst drought in over 50 years. This has started a chain reaction that is causing prices to go up for things like beef, corn, and ... chicken. Chicken wing prices have already gone up, but some believe it could get worse.

Tyson Foods (NYSE: TSN) and Sanderson Farms (NASDAQ: SAFM) are two of several chicken suppliers struggling with this situation. Chicken feed prices have become more expensive because of the drought. In an effort to preserve profitability, output is being cut. Sanderson Farms just recently had a pretty solid quarter, but this drought is making things hard. After a rough 2008 and 2009, Tyson had been getting profits back on track, but it's currently a tough environment to grow profits.

Source: The Motley Fool via Yahoo! Finance; Flying with Fragile Wings, written by Jon Quast.

Very tricky situation... Let's turn to the order flow today. The company has traded 20,153 contracts on total daily average option volume of just 4,154. Calls have traded on a 2.6:1 ratio to puts with the largest action in the Sep 17 calls, where nearly 10,000 contracts have traded. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Sep calls are mostly opening (compare OI to trade size) if they're all one sided. The thing is, I can't really tell if they're all one-sided. Having said that, with vol up in Sep more than any other month, the circumstantial evidence points to substantially more purchases than sales. I do note that the stock volume is right in line with the average, so this doesn't look like a lot of hedged call trading.

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

Ultimately it's the skew that caught my attention. There's an obvious vol diff the has opened up between the front two months (red is Sep, yellow is Oct). I also note the parabolic skew shape in TSN Sep options -- note the strike where vol rises -- it's that 17 line. This is a great example of how the skew shifts intraday as order flow changes vol line-by-line and price discovery occurs in real-time during the trading day.

I've included the Skew Tab from yesterday as an explicit example of how much the skew shape can change in a day due to order flow.

Again, it's this skew shift that caught my eye for this story.

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 rather abrupt drop from six months ago from the $20 range, down to the $14 range in early Aug. Since the closing low of $14.17 on 8-6-2012, the stock has risen ~16% as of this writing, but is still off considerably from it's value six months ago. The 52 wk price range in TSN is [$14.03, $20.92].

On the vol side we can see how the implied rose as the stock dropped in Jun and Jul, and has remained elevated throughout this recent rally. The 52 wk range in IV30™ is [19.40%, 44.78%], putting the current value in the 70th percentile. I do note that the implied is now well elevated to both the short-term and long-term historical realized vols.

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This is trade analysis, not a recommendation.

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