Monday, October 1, 2012

BMC Software (BMC) - Stock and Vol Pop on Takeover News; Disrupted Skew Searches for Price Discovery

BMC is trading $42.72, up 3.0% IV30™ up 28.1%. The LIVEVOL® Pro Summary is below.


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BMC Software, Inc. (BMC) is a software company. The Company provides information technology (IT) management solutions for large, mid-sized and small enterprises and public sector organizations around the world.

This is a vol and skew note -- specifically how skew can be disrupted overnight with a takeover rumor. Let's start wit the news that's driving this vol today. Simply stated, BMC has hired Bank of America Merrill Lynch to help find a buyer according to a report from the Wall Street Journal (source: Reuters).

Let's go straight to the Skew Tab. First, the skew from today.

We can see an awesome front month upside skew -- the OTM calls are bid higher than any other vol on any other line in any other month. Keep in mind that the next earnings release for BMC should be in the Nov cycle (but outside of Oct), so those OTM calls are actually priced higher than the vol in the earnings month. A fair question to ask is, "is this b/c of the news today?" Let's look at the skew as of Friday's close, below.

Here we can see a normal skew shape across all three front expiries -- Nov is the most elevated due to earnings and all three months show no upside skew. In English, yeah, it's the news today that has rocked the skew and the option market now reflects substantially more upside risk (potential) in Oct upside than any other month. This is price discovery at its finest.

We can quickly 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 the gap up today on the news. The 52 wk range is [$31.62, $45.70], so the company is nearing an annual high.

On the vol side we can see the spike up in the implied. Although the IV30™ is just in the 42nd percentile (annual), it's up nearly 30% on the day alone.

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

Just as one example, we can see that the Oct/Nov 48 call spread shows a 5 point vol diff in favor of Oct (without earnings). Very cool.

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1 comment:

  1. This seems like a tough trade to put on, due to the wide bid/ask. Also, would the IV calculation on an option that is .15/.25 or .45/.75 be really impacted by the width of the spread? Meaning that if you buy the ask and later sell the bid you aren't trading on the published IV, which would be a big difference on such cheap options. Do you trade as a MM?