Tuesday, October 2, 2012

Leap Wireless (LEAP) - Vol Rips on PCS Potential Takeover; Skew Shifts Away from Earnings

LEAP is trading $7.94, up 13.4% with IV30™ up 16.7%. The LIVEVOL® Pro Summary is below.


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Leap Wireless International, Inc. (Leap) is a wireless communications carrier that offers digital wireless services in the United States under the Cricket brand. Leap’s Cricket service offerings provide customers with unlimited wireless services for a flat rate without requiring a fixed-term contract or a credit check.

This is a vol, stock and order flow note all based on the news that the DTEGY board (T-Mobile's parent) will be voting tomorrow on a takeover bid for PCS. LEAP and PCS have long been heavy takeover rumor stocks as the general belief supports the idea of consolidation in the mobile phone industry. Here's a quick news snippet:

SAN FRANCISCO (MarketWatch) — Shares of pre-paid wireless carriers MetroPCS Communications and Leap Wireless International saw their stocks surge Tuesday on a deal rumor [...].

Source: MarketWatch via Yahoo! Finance MetroPCS, Leap shares soar; techs mixed, written by Dan Gallagher.

LEAP has traded just under 19,000 contracts on total daily average option volume of 2,016, with calls trading on a 9.6:1 ratio to puts. The Stats Tab is included (below).

The Options Tab (below) illustrates the action. We can see the Oct 8, Jan'13 5 and Jan'13 10 calls are the most active lines, although each strike has existing OI greater than the trade volume today. Even though the stock and vol are up today, it feels like some of this call volume is two-sided. This order flow side isn't obvious to me.

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

We can see two things that are in a sense, in contradiction to each other.

1. The skew shapes are normal across all three front expiries -- there does not seem to be crazy upside call buying and certainly the option market does not reflect elevated upside potential (risk) relative to downside risk. The skew is very much "normally" shaped.

2. The front month is now elevated to the second. Since Nov likely has the next earnings release (but outside of Oct), we would expect to see Nov elevated to Oct, and in fact, this was the case yesterday (before this PCS news). I have included the Skew tab from yesterday, below.

Here we can see that Oct (red curve) was in fact depressed to Nov (yellow curve). So, the contradiction here is that the option market does reflect more risk in Oct than Nov as of today, but not more upside risk (potential). This is more of a homogeneous risk elevation. It's also worth explicitly stating that the option market now reflects more risk in Oct from the PCS news (and any potential reverberations) than it does from earnings. Hmmm...

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 the incredibly "gappy" sock price evolution over the last six months in LEAP, and after all hat, it's essentially unched from six months ago. The 2 wk range in stock price is [$4.28, $11.30].

On the vol side we can see the turn up today in the implied -- a reaction to the PCS news. The 52 wk range  in IV30™ is [51.52%, 133.49%], putting the current level in the 53rd percentile (annual). So, in English, while vol is popping today, the implied is still right in the middle of its annual range.

Ultimately the action is in PCS in terms of news, but the vol move in LEAP is undeniably compelling...

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