Monday, July 1, 2013

CareFusion (CFN) - Volatility Explodes 140% to Annual High; Acquirer Behaves Like Acquiree

CFN closed Friday at $36.85, down 0.7% with IV30™ up 2.4%. The LIVEVOL® Pro Summary is below.

CareFusion Corporation (CareFusion) is a global medical technology company. The Company operates in two segments: Medical Systems and Procedural Solutions. The Medical Systems segment is organized around its medical equipment businesses.

This is a vol and more myopically, a skew note. Specifically elevated vol (at annual highs) and upside leaning skew. Let's jump right into it with the one-year Charts Tab, 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 an impressive price appreciation with the stock rising from $24.86 one-year ago to now ~50% higher. But the vol is the story here -- and it's really compelling. Let's turn to a one-year IV30™ chart in isolation, below.

Checkout that explosion in vol when the implied rose from 18.01% on 5-22-2013 to now 42.85. That's a 138% rise in a month. The catalyst was a news story that revealed CFN may be in talks to purchase the medical division of the British engineering company Smiths Group (Source: Reuters; Smiths Group confirms approach for medical unit; Reporting by Paul Sandle; editing by Kate Holton

What's interesting is that CFN would be the acquirer yet the skew shape has changed as though the are the acquiree. I've included the Skew tab from 5-16-2013 andthe fom Friday's close (6-28-2013), below



Note how the skew on 5-16-213 was downward sloping to the OTM calls (or really, upward sloping to the OTM puts). This would be considered "normal" skew. To learn more about skew, what it is and why it exists, you can read this post:
Understanding Option Skew -- What it is and Why it Exists

Now look to the skew as of Friday's close. The shape as turned parabolic... or said differently, now the OTM calls show elevated risk relative to the ATM options just like the OTM puts. This reflects greater two-tailed risk to shares -- i.e up and down side risk. Hmmm...

Finally, let's turn to the Options Tab.

Across the top we can see that Jul is priced to 44.52% and Aug is priced to 39.34%. In fact, the decrease in vol to further out expiries is monotonic. The option market reflects a new high in annual risk, and it reflects the most risk in this expiration cycle.

This is trade analysis, not a recommendation.

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