Risk Laboratory: Ophir Gottlieb

Monday, June 6, 2011

Lender Processing Services (LPS) - Term Structure Vol Diff

LPS is trading $25.01, down 2.3% with IV30™ up 1.9%. The LIVEVOL® Pro Summary is below.

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Lender Processing Services, Inc. (LPS) is a provider of integrated technology and services to the mortgage lending industry, with mortgage processing and management services in the United States.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

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.

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

I've zoomed in on the ATM strikes -- note how the 25 strike in Jun is bid while the 25 strike in Jul is actually slightly depressed. That makes for an interesting calendar spread to examine, with a ~10 vol point diff.

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

It's interesting that the implied has traded over the realized vol for the full six months on this chart. The vol spread as of right now is near a high. Check out how high IV30™ is relative to the short-term historical vol (HV20™) and the long-term historical vol (HV180™). Specifically:

IV30™: 56.56
HV20: 36.28
HV180: 32.06

The stock has been headed lower of late -- it was ~$35 in Mar and now is more than 25% lower.

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

Potential Trades to Analyze
1. ATM calendar spread:
a. The Jun/Jul ATM straddle calendar spread and sells ~10 vol points higher than it sells.

b. Earnings are due out after the Jul cycle (that's a projection). If that's the case, the Sep cycle is priced at ~55 vol (so ~the same as Jul). The Jun/Sep calendar is an interesting trade to examine while owning earnings. If that Jun/Sep works out, the trade might be extended with a sale of Jul. That would be a double sale of vol to owning depressed earnings vol.

2. OTM calendar spread:
Similar to above, but using strangles instead of the ATM straddle.

This is trade analysis, not a recommendation.

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Pre-Market: 6-6-2011

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This is trade analysis, not a recommendation.

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Friday, June 3, 2011

AK Steel (AKS ) - Skew Diff Gaps on Rumors

AKS is trading $15.05, up 1.8% with IV30™ popping up 12.1%. The LIVEVOL® Pro Summary is below.

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AK Steel Holding Corporation (AK Holding) is a producer of flat-rolled carbon, stainless and electrical steels and tubular products through its wholly owned subsidiary, AK Steel Corporation (AK Steel).

Here the news from TheFlyonTheWall:
10:32 EDT Rumor: AK Steel moves up on speculation it canceled a sell-side conference

The company has traded over 51,000 contracts on total daily average option volume of just 12,405. Calls have traded on a 5.3:1 ratio to puts with the Jun 16 calls the most active (nearly 18,500 contracts have traded). The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the calls have traded on large OI. I believe that interest is long, so IMO, the order flow today is a double down.

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

This is cool. Check out how the upside skew in Jun is super bid, especially as we get to the 17 and 18 strikes.

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 bounces around a lot. On the vol side we can see the IV30™ is popping today -- now elevated to both the short-term historical vol (HV20) and the long-term (HV180).

Possible Trades to Analyze
1. Intra-month skew trade:
The Jun 16/17 call spread sells about 9 vol points more than it purchases and copies order flow. For more risk and more potential gain, the Jun 16/18 call spread is also an interesting one to examine.

2. Inter-month skew trade:
That Jun/Jul call spread sells about 14 vol points more than it purchases. The Jun/Jul 18 call spread sells about 18 vol points higher than it purchases. Diagonals are also interesting -- a Jun/Jul 17/16 c/s scalps about 15 vol points and owns deltas. If that trade works out it can be extended Jun expo by selling another OTM call in Jul.

3. None of that...
Just another rumor that comes to nothing and burns the vega buyers?... Maybe...

This is trade analysis, not a recommendation.

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FULL DISCLOSURE: I'm long calls in Jul and short calls in Jun, small.

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Southern Copper (SCCO) - Skew and Term Structure

SCCO is trading $35.03, down 1.3% with IV30™ up 1.8%. The LIVEVOL® Pro Summary is below.

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Southern Copper Corporation (SCC) is an integrated copper producer. SCC produces copper, molybdenum, zinc and silver. All of the Company's mining, smelting and refining facilities are located in Peru and in Mexico, and it conducts exploration activities in those countries and Chile.

So are we in an inflationary or deflationary period for commodities... A bubble or a long-term change? There's been some interesting news of late in this sector and for this company.

5-30-2011
Copper miners must tap new areas as demand soars, Bloomberg reports
Source: Yahoo! Finance

Then, on 5-31-2011, the stock gapped down about $2. Then on 6-1-2011 the stock went down another $1.30 to close at $33.18.

Today, the stock has came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

There's a pretty clear term-structure difference between the front three months. There's also a vol spike to the upside in Jun OTM calls, but that looks to be sticky markets in the 41 and 42 calls more than anything else. Interestingly, the 39 calls have lower vol than the 38 calls making the Jun 39/41 c/s look rather juicy -- granted very low delta and wide markets.

Now we can turn to the Charts Tab (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 IV30™ has been rising of late. You can't see it in the 6 mos chart, but IV30™ has actually traded a little above 60 in the last 52 wks. The HV20 has paced the IV30™, both are now substantially elevated to the HV180 (long-term realized vol).

IV30™: 46.75
HV20: 50.32
HV180: 34.57

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

Potential Trades to Analyze
1. Inter-month call spread:
As I noted in the discussion of the skew tab, the Jun 39 calls show a slightly lower vol than the surrounding lines while the Jun 41 calls spike to 55 vol. The crucial part to this trade would be getting prices significantly better than the NBBO the bad way.

2. Calendar spreads
Jun/Jul, Jun/Sep, Jul/Sep or even Jun/Sep and after Jun expiration then Jul/Sep -- that last one would involve selling elevated vol twice to one depressed purchase, but risks being short gamma.

This is trade analysis, not a recommendation.

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Pre-Market: 6-3-2011

To get an e-mail alert when a new pre-market report is posted please send an e-mail to support (support (at) livevol.com) with "Pre-market" in the subject line.

This report will be growing in the very near future to include much more analysis.

Download as .pdf: PDF Download

This is trade analysis, not a recommendation.

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Thursday, June 2, 2011

Blackboard Inc. (BBBB) - Vol Diff In Takeover Shopping

BBBB is trading $41.99, down small with IV30™ down 1.4% as of ~ 11:10am EST. The LIVEVOL® Pro Summary is below.

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I posted this one to TheStreet.com (OptionsProfits), so no specific trade analysis -- here's a quick note.

Blackboard Inc. is a provider of enterprise software applications and related services to the education industry. The Company’s various software applications are delivered in its six product lines: Blackboard Learn, Blackboard Transact, Blackboard Connect, Blackboard Mobile, Blackboard Collaborate, and Blackboard Analytics.

I found this stock in a custom scan that searches for calendar spreads between the second and third months.

Custom Scan Details
Stock Price GTE $5
Sigma2 - Sigma3 GTE 7
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 and LTE 50
Sigma2, Sigma3 GTE 1

The goal with this scan is to identify third months that are cheaper than the second month by at least 7 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 Charts Tab. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

The most obvious point in the chart is the stock pop on 4-19-2011. Here’s the driving news:

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Education software company Blackboard Inc. said Tuesday that it has retained Barclays Capital as a financial adviser to consult in takeover talks.

The company said it has receiving unsolicited, non-binding proposals to acquire the company but provided no details on the potential buyer or terms of the offers.
Blackboard said it is evaluating the offers as well as strategic alternatives.
Source: AP
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It’s interesting to note that the stock has steadily headed down since that news and has essentially cut the one day pop gain I half over the last 6 weeks. The stock price the day before the pop was $37.16. Let’s turn to the Skew Tab.

We can see that the Jul vol (58.76) is elevated to Oct (46.99). The greatest vol difference opens up to the Jul 50 calls – which are oddly bid.

Let’s turn to the Options Tab for completeness.

This is trade analysis, not a recommendation.

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Brocade Communications (BRCD) - Vol and Stock Pop on Dell Takeover Rumor

BRCD is trading $6.99, up 4.7% with IV30™ up 15.4%. The LIVEVOL® Pro Summary is below.

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Brocade Communications Systems, Inc. (Brocade), incorporated on August 24, 1995, is a supplier of networking equipment, including end-to-end Internet Protocol (IP)-based Ethernet networking solutions and storage area networking solutions for businesses and organizations of all types and sizes, including global enterprises, and service providers, such as telecommunication firms, cable operators and mobile carriers.

The stock and order flow are moving on a nice article posted by Forbes. Here are some snippets:
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Is Dell shopping for a networking equipment company to buy?

Canaccord Genuity analyst Paul Mansky thinks so. In a research note this morning, he notes that Dell “has been busily assembling a full IT stack aimed at realigning the company away from secularly less attractive legacy businesses (like PCs) and incrementally toward future growth in the enterprise.”

[He] thinks Dell will be shopping for a networking company, and soon, for several reasons:

•The PC market is arguably headed into an accelerating secular decline (units and ASPs) at the hands of tablets – Dell’s cash engine.
•Dell has clearly been seeing success cross-selling Ethernet switching with servers and storage, evidenced by reported results and qualitative commentary from Dell executives.
•Dell’s this week made a shelf filing for a potential $3.5 billion debt filing; the company also has $7 billion in net cash.

Mansky says his bet is that Dell with bid for Brocade, a company he rates a Buy with a $7.50 price target; he thinks Dell; could pay as much as $10 for the company.

Source:Will Dell Buy Brocade? written by Eric Savitz.
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Compelling stuff. Having said that, BRCD hit as high as $7.20 and as of this writing has actually broken to $6.90. The company has traded over 61,000 contracts on total daily average option volume of just 11,213. Calls have traded on a 3.7:1 ratio to puts. The most active line is the Jul 8 call, where over 25,000 have traded. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Jul 8 calls are mostly opening if they're on the same side (compare OI to trade size). We can also see that the Jul 7 calls have an existing OI of over 32,000 -- with ~ 10,000 of that opening yesterday.

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

The skew is upward sloping to the OTM calls for both of the front months. I've highlighted the Jul 8 calls (the ones trading today). I looked back at BRCD skew for the last 3 months and in general, it's upward sloping to the OTM calls. I randomly selected 4-15-2011 and included it below to illustrate the point.

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 pop today after a steady rise since mid April. We can also see the IV30™ pop -- quote substantial. Finally, we can see that IV30™ has traded elevated to the HV20 and HV180 (the short-term and long-term historical realized vols) for a couple of months, now.

Possible Trades to Analyze
Given the upside skew and elevated front month to the second (and third months) -- a calendar spread or diagonal calendar (to pick up deltas) seem like interesting trades to examine. Owning Oct and selling Jun, then Jul (after Jun expo) is one way to have a prolonged exposure to a potential takeover while slowly lowering the amount risked with subsequent vol sales.

Of course, given that BRCD has had the upside skew for a while with no takeove as of yet -- this might also be a head fake... again...

This is trade analysis, not a recommendation.

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Wednesday, June 1, 2011

For-profit Colleges (CECO, COCO, ESI) - Rising Vol on Senate Hearing

CECO, COCO and ESI are trading $22.26, $3.95 and $70.14, respectively each up at least 2.0% with IV30™ up 14.2%, 37.3% and 12.5%, respectively. The LIVEVOL® Pro Summaries are below.

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These are all for profit education companies. The news driving the vols is this:

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U.S. Senator Tom Harkin, chairman of the Senate education committee, will hold a fifth hearing on for-profit colleges on June 7.

The hearing will focus on debt levels among former students of the colleges, said Justine Sessions, a spokeswoman for Harkin, an Iowa Democrat. A list of witnesses for the hearing is forthcoming, she said today in a telephone interview.

The Education Department is preparing to release regulations that will restrict government aid to for-profit colleges whose former students struggle to repay their loans. Harkin’s hearings have focused on the colleges’ recruitment techniques and their rising share of federal student aid. He has said he plans to introduce legislation to protect college students.

“We will not be surprised if this hearing has a decidedly negative slant on the industry,” Jeff Silber, an analyst at BMO Capital Markets in New York, said in a note to clients today. He has a “market perform” rating on the industry.
Source: Bloomberg - Senator to Hold Hearing on For-Profit Colleges on June 7, written by John Lauerman.
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It is interesting to note the stock price moves and the order flow today. Let's focus on CECO, though the other two are similar.

The company has traded over 10,600 contracts on total daily average option volume of just 1,433. Calls have traded on a 5.3:1 ratio to puts with the action in the Jun 23 and 24 calls - combining for over 7,800 contracts. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Jun 23 calls are mostly opening (compare OI to trade size). I believe those are substantially purchases. The Jun 24 calls show a large OI almost equal to the trade volume (thus far). I believe the Jun 24 calls are purchases as well and I think that interest is long, but I'm not sure. It opened on 5-13-2011. Interestingly, on 5-12-2011, ESI Jun 77.5 calls opened substantially as well. So someone was opening positions in mid May on these guys.

The Skew Tab snap (below) illustrates the vols by strike by month. I've included all three.

The similarities are pretty obvious -- all three show substantially elevated vol in the front month (red line) to the back months. COCO does show an upward sloping skew, unlike the other two -- but COCO is also a $3.95 stock, so I dunno how much you can really read into that.

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 pop in IV30™, today. All three look like that. The stock price has stayed in a relatively tight range of late -- looks anticipatory almost -- waiting for a reason to go up or down.

Possible Trades to Analyze
Calendar spreads feel risky given the news that may be coming out. Having said that, they are still worth examining -- even strike-by-strike to find some nice trades. It doesn't look like there's any really good pair or triplets trades as these three essentially behave the same. At least ESI and CECO seem to correlate almost frighteningly high. COCO, as a penny stock (or close to it), does seem to have some more firm specific "stuff" going on considering it's about 80% smaller than both ESI and CECO in market cap. That may also be why the vol is 40% higher in COCO than the other two.

This is trade analysis, not a recommendation.

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UltraShort China (FXP) - Order Flow, Vol and Fraud

FXP is trading $25.93, up 2.5% with IV30™ up 6.3% as of ~10:40am EST. The Livevol® Pro Summary is included below.

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The investment seeks daily investment results, before fees and expenses, which correspond to twice (200%) the inverse (opposite) of the daily performance of the FTSE China 25 Index®.

I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis in this blog. But, this is more of a general piece anyway -- examining China and fraud.

The ETF has traded 9,127 contracts in the first hour (ish) on total daily average volume of just 684. All but 94 contracts have been calls yielding a 96.1:1 call:put ratio. The Jul 26 calls have trade over 8,500x. The Livevol® Pro Stats Tab is included below.

China has been on my radar because of the financial fraud worries that are swirling. In another life I was the director of research at Audit Integrity -- a great quant forensic risk and fraud firm. I published some research which illustrates empirically that fraud clusters (and how to price a fraud swap – contact me for details).

In English, frauds beget other frauds. As we have started to uncover fraudulent accounting in China, it’s possible that the frauds (or really, fraud discoveries) will catapult into what we had after the Internet bubble in this country (Enron, WorldCom, HealthSouth, Global Crossing, etc.). If that’s the case, there’s a non-trivial possibility that the Chinese equity markets spasm lower – and by spasm, I mean more than 25% in less than a year.

Let’s look to the Skew Tab for FXP and examine the month-to-month and line-by-line vols.

We can see the front month shows a bend up to the OTM calls. This is actually “normal” skew, as the ETF is a short investment. It’s interesting to note that the Jul calls actually bend back down after the 30 strike. I’m actually not convinced that the order flow today in the July options is substantially purchases, although the elevated vol is confirming evidence of purchases.

Let’s turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

The IV30™ is up today and at least for now is higher than the short-term and long-term historical vols. Having said that, the vol isn’t extraordinarily high or low for this issue.

I’ve included the Options Tab below for completeness.

I’ve highlighted the Jul 26 calls. The existing OI is just 90, so if the trades are one-sided today, those are opening positions. You’ll note that there isn’t a single line with more than 300 OI – so yeah, 8,500 in an hour is sizable for this issue.

This is trade analysis, not a recommendation.

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