Thursday, December 4, 2014

* ON Semiconductor (ONNN) - Call Buyers Crowd In; Explode Skew and Stock

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Disclosure: The hedge fund is long ONNN.

ONNN is trading $9.84, up small with IV30™ up 12.0%. The Symbol Summary is included below.

Provided by Livevol

UPDATE 12-5-2014

Provided by Livevol

The stock continues to rise, the volatility continues to rise and the call buying continues to rise.


ONNN is up ~50% in a month and the option order flow of late has been decidedly to the call buying side, pushing volatility and, more specifically call skew higher.

Here are the tweets I've sent out recently:

Let's turn to the Stats Tab as of the end of the day.

Provided by Livevol

We can see over 12,000 calls traded today on total daily average of 475.  That type of order flow was echoed in the prior tweets (above).  Call buyers are a plenty.

Btw, I get all of this data from Livevol; the advertisement is below for a free trial.

The Charts Tab (two-years) stock return is below.

Provided by Livevol

Just look at that recent pop... it's remarkable.

For a very quick look at the financials, I have charted Revenue (TTM) vs. Net Income (TTM) below in a time series.

We can see net income (red line) has risen from a $90 million loss (ish) to a $210 million gain (ish).

I created this visual with Capital Market Labs software (the company I run); you can get a free trial of this software by clicking the ad below.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  The recent order flow and price movement have pushed volatility (risk) up in the short-term.  In fact, the continual call buying has been so sizable (relative to the average) that it is pushing the skew.

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

Provided by Livevol

The skew represents the volatility by strike.  Normally option skew gets lower as we move to the out-of-the-money (OTM) calls , but in rare cases, like this one, the skew can "reverse" due to order flow.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$9, $11] by the end of trading on January 16th.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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