Risk Laboratory: Ophir Gottlieb

Wednesday, January 5, 2011

TIVO - Large Bet on Stock Double

TIVO is trading $9.76, up 7.9% with IV30™ up 8.8%. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size).

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

I've highlighted the May strikes that traded. Note the distinct upside skew in Jan, muted but still present in Feb and then totally reversed in May... Kinda weird...

Finally, the Charts Tab (12 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

So in early March, TIVO gapped up 60% (ish). Then, in early May, it went all the way back down and then straggled below $7. Now it's nearly $10 and someone went size in the 17.5/20 call spread. The only real news I see today is a conference where they are presenting. Also weird...

The May 17.5/20 call spread went for $0.32. It looks like you can do the May 15/17.5 call spread for ~$0.40. I dunno, that feels better to me than the 17.5/20, no?...

Either way, this is a bet that's not likely to payout , but the question to ask is:
Is the payout better than the odds? If so, it's a do. If not, it's a pass. Either way, it'll be interesting to see how TIVO and the forever patent infringement case/appeal end up. IMHO, TIVO is a great technology and it suffered from being too far ahead of its time. Maybe it will recover some of the lost rents in the court case... I guess we'll see... eventually.

This is trade analysis, not a recommendation.

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Pan American Silver (PAAS) - Elevated Vol, Dipping Precious Metal Prices

PAAS is trading $38.10, down 2.3% with IV30™ up 3.2%. The LIVEVOL™ Pro Summary is below.

I found this stock using a real-time custom scan. This one hunts for high vols.

Custom Scan Details
Stock Price >= $7 and <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 and <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). 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 IV30™ simply because earnings are approaching.

The PAAS Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see:
IV30™: 45.22
HV20™: 32.39
HV180™: 36.16

So, IV30™ is elevated relative to the short-term and long-term realized movement of the stock. Vol is jumping on the stock drop.

Here's some news from Reuters:
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Spot gold fell 2.6 percent on Tuesday, its biggest one-day drop since November, hitting $1,377.80 an ounce. Spot silver fell 4.2 percent to $29.37 an ounce.
Source: Reuters - Gold, silver miners tumble as spot prices drop
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Let's look to the Options Tab (below).

We can see a lot of OTM options are bid. The $1 strikes help. Note how the Jan 45 calls are $0.10 bid as are the Jan 33 puts.

Another phenomenon, the Feb ATM straddle (with the possibility of earnings) is priced at ~ 45.5 vol while Jan ATM straddle is priced similarly at ~ 44 vol.

So the question is out there: Is this time to buy the precious metals for an upcoming rally, or is this the beginning of longer term slide?

More specific to PAAS, when are earnings? Feb or Mar? If you want to make a bet on earnings being in Feb, a calendar selling Jan to purchase Feb might make sense.

This is trade analysis, not a recommendation.

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CBS (CBS) - Earnings Vol Seller

CBS closed yesterday at $19.42, up 0.7% with IV30™ down 3.4%. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates that the calls and puts are mostly opening (compare OI to trade size). The earnings are confirmed (from what I see) for 2-16-2011, which is in the Feb cycle. Or, in English, someone was selling ~ 31 earnings vol.

Let's take a look at some earnings stats for the last few cycles for CBS.

First thing to notice outside of this table, the stock is up size from two years ago. CBS was a ~$5 stock and is now nearly $20... Nice job CBS.

Ok, onto the options:
It looks like in the last 4/5 earnings cycles, the ATM straddle was a sale. BUT, going out to the sixth cycle, the stock gapped up huge making that short straddle a big loser. In general vol looks kinda fairish on earnings. The average ATM vol on the day of earnings in the front month for the last four cycles was ~59 vol. We're way too early to see what the vol will be on 2-15-2011.

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

We can see the Feb vol sitting above Jan, as expected. Other than that, it's pretty normal shaped.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock has steadily climbed over the last 6 months. On the vol side (bottom), we can see the IV30™ is right in between the long-term and short-term realized. Note that this feels like an earnings vol bet, not an IV30™ bet.

One last thing to notice, the 20 straddle in Feb does carry a delta, so this can be seen as a bet that earnings vol will be too high (or is too high) and that CBS heads to the $20 range rather than down.

This is trade analysis, not a recommendation.

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Tuesday, January 4, 2011

AutoZone (AZO) - Auto Parts Sector in Play

AZO is trading $258.22, down 3.8% with IV30™ up 17.5%. The LIVEVOL™ Pro Summary is below.

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I never thought I'd say this, but the auto parts industry looks interesting right now. I found AZO because its vol is up so much today.

Here's the industry low down in super fast mode. MUCH props to MotleyFool.com for this great article.

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For the automotive replacement parts industry and parts retailers the road has been much less bumpy than most industries over the last couple of years. As consumers worried about having enough to spend on the bare essentials, purchasing a new car was the least of their priorities. The average age of vehicles on the road has continued to increase, as has the mileage driven. In addition, the automakers' troubles resulted in thousand of dealership closings that has sent many drivers in need of repairs to independent garages that the parts retailers service.

These favorable trends have helped the replacement parts sector become one of the best performing throughout the recession and in the slow recovery currently taking hold.

Is the trend your friend?
The recent continuation of these trends was confirmed last week by the country's largest aftermarket auto parts retailer, AutoZone (NYSE: AZO). Like its top competitors O'Reilly Auto Parts (Nasdaq: ORLY) and Advance Auto Parts (NYSE: AAP), AutoZone easily topped analyst estimates in its most recent quarter. In fact, the company's first quarter was the eighth consecutive quarter in which earnings per share grew by more than 20%, and the 17th straight quarter that saw a greater-than-10% increase in EPS.

However, for the first time in many months I began to hear some caution, or at least a taming of expectations on the company's conference call. I don't believe AutoZone executives believe that the sector's growth is going to slow substantially, but perhaps the perfect confluence of conditions that have supported this growth of late are beginning to subside.
Source: Will Auto Parts Dominate Again in 2011?
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And then, from Investors.com:
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Advance Auto Parts (AAP) tumbled 4%, making its deepest drop below the 50-day moving average since the stock was forming its base in February. The auto parts chain broke out in April and had found support at its 50-day line repeatedly since then. The company has posted accelerating earnings growth the past two quarters, but it suffers from the same drawback as others in its industry: unimpressive sales growth.
Source: Stock Losses Worsen At Midday
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Hmm...

The AZO Charts Tab (vol only) is included (below): (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

IV30™: 22.20
HV20™: 14.37
HV180™: 17.67

We can see the IV30™ is ripping today on the downward stock move. Finally, let's look to the Options Tab.

Notice that the Jan ATM straddle is worth ~ $10.00 and the stock has moved more than that today alone. Also, hmm...

Possible Trades to Analyze
With all these strikes, I'll just go over some general staretgies, rather than specific trades:

1. Buy the front month vol b/c hey, the stock has moved more than the ATM in one day. The trick here is to pick the straddle that the stock is going away from.

2. Sell the front month vol, it's elevated. The trick here is to sell the straddle where you think the stock is going toward.

3. A little more sophisticated. How's this for a best case scenario?
1. Sell the ATM vol b/c it's high
2. Purchase the earnings vol b/c it isn't that much higher than the front.
If the stock sits in Jan, then you might own a cheap ATM straddle into earnings (March, I think). How many $11 straddles would you buy for a $260 stock that moved $10 today with an earning event and two months of time value?... Where did the number $11 come from? It's the cost to calendar the ATM from Jan to Mar. Hmmm...

This is trade analysis, not a recommendation.

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MGIC Investment (MTG) - Mortgage Insurer and Company Specific Risk

MTG is trading $10.55, down 2.1% with IV30™ up 14.6%. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates the action - the Jan 12.5 calls have traded more than 34,000x and are mostly opening (compare OI to trade size). These look like purchases to me.

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

We can see the Jan upside is bid from the order flow, though Feb and Mar are not. The Jan 14 calls are just a $0.02 bid, so don't get too excited about that vol.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock rise and most notably, the vol spike. It turns out that MBI and PMI actually have lower vol today, so MTG is acting on it's own which points to some company specific news and risk.

Possible Trades to Analyze
1. Spread the months and the skew to the upside:
Sell 1 MTG Jan 12.5 call @ $0.13 (~73 vol).
Buy 1 MTG Feb 12 call for $0.47 (~67 vol).
Pay $0.34 for some upside AND get yourself some earnings vol for less than front month vol. A pretty cool trade and vol irregularity...

2. A little more risk and little more interesting:
Do #1 but sell 2 Jan 12.5 calls yielding a net debit of $0.21.

3. Any kind of call spread between the front two months that buys the earnings month for cheaper than the front month seems like a reasonable trade to analyze.

This is trade analysis, not a recommendation.

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NVIDIA (NVDA) - Calls Trade, Vol Pops, Skew Opens up Trades

NVDA closed yesterday at $15.82, up 2.7% with IV30™ up 10.2%. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates that the calls in Feb are mostly opening (compare OI to trade size). Jan is tougher to see. As of this morning:
Jan 15 call OI: 47,821 ---> 60,119
Jan 16 call OI: 29,427 ---> 31,348

I believe the OI is long, but I'm not sure. I am more confident in the Jan 15 line being long than the Jan 16 line.

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

I've highlighted the four strikes that were active. We can see a noticeable upside skew in Jan, with Feb and Mar sort of flattish.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock has steadily climbed over the last few months. On the vol side (bottom) we can see the IV30™ (short-term implied vol) is headed for the HV180™ (long-term realized vol) and is now well passed the HV20™ (short-term realized vol). As of this writing, the IV30™ is up another 0.5% today.

Possible Trades to Analyze
1. Jan Skew Hunting:
Buy the Jan 16/17.5 call spread for $0.34.
This purchases ~42 vol versus a ~49 vol sale in a call spread. Note that this is a $1.5 call spread, so some nice upside.

2. Small Skew Hunting:
For a small bet with low odds of success but a nice payout on a takeover, try paying $0.02 in the Jan 19/20 call spread. That's about a 6 point vol scalp, but again, likely a loser with a 50:1 MaxGain:MaxLoss ratio.

3. A sneaky Calendar with Delta and Skew:
Sell 1 Jan 17.5 call @ $.18 (~49 vol).
Buy 1 Feb 17 call for $0.56 (~44 vol).
Pay $0.38 to own upside and possibly earnings vol. This is my favorite trade. Note that earnings are very likely to be in Mar NOT Feb... NOT Feb... NOT Feb...

If NVDA doesn't bust through 17.5 by Jan expo, selling the Feb 18 calls against that long 17 call might leg into a call spread for free... Ooo, tricky....

This is trade analysis, not a recommendation.

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Monday, January 3, 2011

General Motors (GM) - Sup With That Market Cap?

GM is trading $37.44, up 1.6% with IV30™ up 10.3%. The LIVEVOL™ Pro Summary is below.

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The GM Charts Tab (vol only) is included (below): (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

IV30™: 28.73
HV20™: 19.69
HV180™: 19.26

So IV30™ is actually elevated to both the short-term and long-term realized vols. Keep in mind, this issue just started trading recently, so there ain't a whole lot of data for this "New GM."

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

I love these rickety skews b/c it brings up a bunch of trading opportunities. One caveat for this one - the vol diffs are actually pretty small in absolute size and once you account for the width of the option markets, a lot of the fun goes away.

Let's look to the Options Tab.

Possible Trades to Analyze
1. The stock has moved $0.64 today and the Weekly straddle is priced @ ~$1.05. If you're in the mood for a gamble buy this elevated vol in hopes that it moves in the next few days:
Buy the Jan (W) 37 straddle for $1.05.

2. The exact opposite of #1, sell that elevated vol.
Sell the Jan (W) 37/38 strangle @ $0.50 or ~ 28.5 vol.

3. More Risky:
Buy 1 Jan (Monthly) 37 call for $1.20.
Sell 1 Jan (W) 38 call @ $0.25.
Sell 1 Jan (W) 37 put @ $0.25
Sell 1 Jan (Monthly) 38 all @ $0.65.
This yields a $0.15 debit and if GM plays nice for the next few days, it leaves a $1 call spread for just $0.15 in Jan. Of course, you can also get your face ripped off if this moves size.

This is trade analysis, not a recommendation.

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H&R Block (HRB) - Stock and Vol Climb on Credit Ratings

HRB is trading $12.77, up 7.2% with IV30™ up 11.9%. The LIVEVOL™ Pro Summary is below.

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I wrote about HRB on 12-27-2010:
H&R Block (HRB) - Credit Watch and Law Changes Pop Vol

Here's a quick review of the news:
12-22-2010:
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NEW YORK -- Standard & Poor's affirmed its ratings on tax preparer H&R Block Inc. on Wednesday but said its outlook on the company is "negative."
S&P also removed Block's ratings from CreditWatch Negative. The ratings had been placed there in October, after the company said it was taking legal action to force HSBC's U.S. finance arm to offer refund anticipation loans for the 2011 tax season.

The company's "BBB/A-2" counterparty credit rating falls into S&P's investment-grade category.

S&P said it removed the company from CreditWatch after Block said that it is still in negotiations and litigation with HSBC. S&P said it believes that being able to offer refund anticipation loans will help Block attract and retain tax-preparation clients and that if it can't offer them, its revenue will suffer. Block's management has described the potential impact as "significant."
Source: AP
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12-27-2010:
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Tax prep company H&R Block announced on Friday that it had lost a contract with HSBC after a federal regulator told HSBC to stop offering refund anticipation loans. The Office of the Comptroller of the Currency prohibited HSBC (HBC) from offering the loans, which forced the bank to end its long-term contract providing loans to H&R Block (HRB) customers, H&R Block said in its release.
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This story is still compelling to me given the stock pop. Today, I found this stock using a custom scan I built searching for names where IV30™ is up at least 10% today. The scan details are below with a snapshot if you want to build it yourself in Livevol Pro.

Custom Scan Details
Stock Price >= 10
Average Option Volume >= 1,200
Days After Earnings >= 5 and <= 60
IV30™ Percent Change >= 10%
IV30™ >= 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

The HRB Charts Tab (vol only) is included (below): (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

IV30™: 48.35
HV20™: 40.57
HV180™: 41.01

The rise on IV30™ makes sense given the news, but why is the stock climbing? Hmm...

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

The skew bends to the upside in Jan, not in Feb. Note the fat vol difference between the Jan and Feb 14 OTM calls. Finally, let's look to the Options Tab.

Possible Trades to Analyze
1. Sell the elevated Jan skew versus Feb.
Sell 1 Jan 14 call @ $0.15 (~53 vol).
Buy 1 Feb 14 call for $0.35 (~45 vol).
Pay $0.20 for Feb upside.

2. Riskier:
Buy 1 Feb 13 calls for $0.75
Sell 2 Jan 14 calls @ $0.15
Pay $0.45 to get some more deltas, but be naked upside through Jan. If this trade works out ok (i.e. HRB stick below $14), then that long Feb 13 call can be spread off with a Feb 14 calls and possibly reduce the net debit to ~$0.15 for a $1 call spread.

3. The other side of the deltas:
Sell 1 Jan 12.5 put @ $0.40 (~47 vol).
Buy 1 Feb 13 put for $1.00 (~45 vol).
This gets some short deltas. If HRB can hold the stock level about here, that long Feb 13 put should be a winner on expo.

This is trade analysis, not a recommendation.

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Cheniere (LNG) - Calls Trade Size Again, Earnings Bets Roll In

LNG is trading $5.99, up 8.5% with IV30™ up 2.3%. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates that the calls in March are mostly opening (compare OI to trade size). We can also see the huge OI in the Mar 8 calls. If you go to the Options Tab and click on the strike, you can see the OI chart (included below). Holding the mouse button down shows us that those calls opened on 12-29-2010. Earnings are projected for the March cycle.

So in the last few trading days, more than 20,000 calls in Mar have opened, and I see them as substantially long interest. The Skew Tab snap (below) illustrates the vols by strike by month.

As expected, we can see the upside skew is bid for Jan, Feb and Mar. I've highlighted the 8 and 9 strikes in March. I'll repeat again, this was a ~$2.50 stock in October and now the Mar 8 and 9 calls have 20,000 long interest.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock rip up in late Nov and pretty much hold onto those gains. It feels like the IV30™ can go higher given this order flow and the past stock movement. HV30™ is over 100 (ok, it's 100.46, but that's till over).

Possible Trades to Analyze
If you want to play this upside, here are some interesting trades:

1. Buy the Feb/Mar 8/7 call spread:
Sell 1 Feb 8 call @ $0.15.
Buy 1 Mar 7 call for $0.60.
That's just $0.45 to own the upside in March (earnings cycle) where the order flow is. Then again, this is a $6 stock.

2. Just trade March:
Buy the Mar 7/8 call spread for $0.20 if possible. A nice cheap bet siding with order flow.

3. Slightly Contrarian and taking on the risk:
Buy 1 Mar 7 call for $0.60
Sell 2 Mar 9 calls @ $0.25
This is a $0.10 outlay, but is naked upside above $11 (ish).

This is trade analysis, not a recommendation.

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