Friday, November 8, 2013

NCR - Calendar Volatility Difference Opens; Skew Points to Upside Move in One Week

NCR is trading $34.60, up 2.5% with IV30™ up 5.4%. The Symbol Summary is included below.

Provided by Livevol

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.  But there is even more to this story, a curious skew shape divergence which exponentiates the calendar diff to the upside.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Let's start with the Skew Tab, below.

Provided by Livevol

We can see two phenomena here:
1. The red curve (Nov option volatility) is above the yellow curve (Dec option volatility) for all strike prices.

2. The red curve (Nov options) show a distinct bend to the upside, which means the out-of-the-money calls (OTM) are priced higher than the at-the-money (ATM) options and the OTM puts.  In English, the option market reflects a substantially higher likelihood of an upside move in NCR stock price in the near-term (the next eight calendar days) than it does in the medium-term (December expiration).

The result is a large widening of the volatility difference (the space in between the two curves) to the upside.  For the record, the current shape of the Nov (red curve) skew is "not normal."  To read about option skew, what it is and why it exists, you can read the post below by clicking on the title:

Understanding Option Skew -- What it is and Why it Exists

Now we can turn to the two-year Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

We can see that NCR has climbed from $18.29 to $34.60 in two years, so a ~90% rise.  But, let us also note that the last earnings release showed a significant stock drop (the blue "E" icons represent earnings dates).  The stock fell from $40.53 to $36.25 in a single day.  So, we have a stock with a longer-term track record of remarkable equity performance, a short -term track record of disappointing earnings, more risk in the immediate-tem (Nov options) than the intermediate-term (Dec options), and finally, a higher probability of an upside move in Nov than Dec.

Finally, let's look to the Options Tab (below).

Provided by Livevol

Across the top we can see the monthly vols are priced to 50.90% and 37.88% for Nov and Dec respectively.  But, that ~13 vol point difference opens up to 22 vol points when you examine the OTM calls (like the Nov/Dec 40 call spread volatility difference).

Let's see if the next eight days do in fact prove to be volatile and to the upside for NCR, or if this is nothing more than noise.

This is trade analysis, not a recommendation.

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