Avon Products (AVP) - A Different Vol Comp as Delta and Vega Buyer Steps in Jan

AVP is trading $21.51, up 2.4% with IV30™ down 0.4%. The LIVEVOL® Pro Summary is below.



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Avon Products, Inc. (Avon) creates, manufactures and markets beauty and non-beauty-related products. The Company’s product categories are Beauty, Fashion and Home.

This is an order flow note as we have enough vol posts to analyze and more will come next week. AVP has traded over 15,000 contracts on total daily average option volume of just 5,026. Calls have traded on a 45.4:1 ratio to puts. The action is in the Jan'12 22.5 calls where over 10k have traded. The trades look like purchases, though the vol in Jan'12 is down. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the Jan'12 22.5 calls are mostly opening (compare OI to trade size). When looking down the entire option chain for AVP, only the Aug 20 puts show a larger OI than 10,000, so this trade size is notable for AVP.



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



I've included the front four months so we can get the Jan'12 skew in there. In general, the skew across the months looks pretty normal -- even the Jan'12 22.5 calls aren't showing a kink in vol. The Aug 23 calls do show some bid vol, but that's just a nickel bid, so... ya know... not that exciting.

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).



While the stock chart for AVP looks like essentially every other company in the US market, the vol chart doesn't. The HV20 is well above the IV30™. In English, unlike the vast majority of the market, AVP stock has moved more than the implied -- i.e. the option markets have reflected less stock movement than was actually realized. Hmmm... Right now the vols like this:

IV30™: 40.80
HV20: 57.57
HV180: 28.69

It's also interesting to note that the HV10 is 75.72 -- so well above the implied. It is equally important to note that the implied is well above the long-term historical average (HV180) -- so this isn't really "cheap" vol.

Possible Trades to Analyze
The next earnings cycle for AVP looks to be after the Oct expiration cycle (just a guess) as the last two Oct earnings reports were on the 28th and 29th in 2010 and 2009, respectively. That would make the Jan'12 options an earnings cycle (sort of -- the Nov options will be the real cycle).

With vega buyers in Jan and the vol down today, it's not the worst idea in the world to analyze buying some vega. Having said that, let's not forget the relative levels of the longer-term HV to the IV in Jan -- i.e. ~29 to ~37. Not an obviously "cheap" purchase by any stretch.

This is trade analysis, not a recommendation.

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Norfolk Southern (NSC) - Elevated "Low" Vol

NSC is trading $68.22, up 0.3% with IV30™ down 6.3%. The LIVEVOL® Pro Summary is below.



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Norfolk Southern Corporation (Norfolk Southern) is a Virginia based company that controls a railroad, Norfolk Southern Railway Company.

Since there are so many interesting calendar spread candidates available I decided to focus on one where the absolute level of implied and the long-term historical is relatively low. This makes the short gamma/long vega position a touch more palatable. NSC came up on the real-time front to second month calendar spread custom scan and has an HV180 (long-term realized vol) of 22.77. Nice, let's work with a 23 realized vol stock and a 38 implied.

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 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.

The vol diff for NSC is actually less than the 8 points in the scan, but the downside gets us the vol diff we need for an interesting analysis. Let's start with the Skew Tab (below).



We can see an annoyingly smooth skew which yields no specific strike spreads that jump out, but the downside vol diff inter-month does grow to double digits on the 62.5 and 60 strikes.

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).



So we see the basic stock drop and slight recovery -- i.e. like most all stocks traded in the US markets of late. The implied has popped but the realized short-term moves have essentially paced the implied. Nice and neat fair vol pricing (ish). As of right now the vols are:

IV30™: 38.15
HV20: 37.30
HV180: 22.77

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



Potential Trades to Analyze
1. Calendar Spreads
The downside calendars between the front two months offer some nice vol diffs. The Aug/Sep 62.5 put spread sells ~10 vol points higher than it purchases. The Aug/Sep put spread sells nearly 20 vol points higher than it purchases. The ATM yields ~7 vol points and the upside looks more like 5 vol points.

2. Intra-month Vol Sale
The ATM vol in Aug is priced at ~45. From above (Charts Tab) we can see that is quite elevated to the HV20. I do note that HV10 (the last 10 trading days) is 48.84, so all of a sudden being short that gamma isn't automatic. For you vega sellers (rather than vega buyers through the calendar spread), a vol sale ATM may be worth some analyses, but do note that vol levels (duh).

This is trade analysis, not a recommendation.

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Home Depot (HD) - Cheap Elevated Earnings Vol?

HD is trading $29.91, up 4.9% with IV30™ down 10.0%. The LIVEVOL® Pro Summary is below.



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The Home Depot, Inc. (The Home Depot) is a home improvement retailer. The Home Depot stores sells an assortment of building materials, home improvement and lawn and garden products and provide a number of services.

This is an interesting one where the vol is elevated, yet it somehow feels cheap... Huh?...

Let's start with the Charts Tab (6 months), 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 drop and the corresponding vol pop. This chart looks like any number of companies randomly selected from the S&P 500 -- it's systematic risk that's driving individual equities, so this chart isn't unique. The IV30™ is elevated to the historical measures, specifically:

IV30™: 43.39
HV20: 39.01
HV180: 23.16

So the implied is elevated to the historical measures. What is unique to HD is that the company has earnings due out this expiration cycle, 8-16-2011 BMO. Hmm...

Let's turn to the Skew Tab.



The skew shape is normal, even pretty, with the downside bid relative to the upside. The term structure reveals a monotonic decrease moving from the front month to the back. The skew ain't the story, IMO.

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



Here's where it gets interesting. The last five day over day changes (close-to-close) for HD have been:



So the absolute daily average change has been $1.38... The ATM straddle in Aug is priced at $1.83. Throw in that there's an earnings cycle (vol event) embedded in the options, and all of a sudden that elevated vol, kinda feels cheap?... No?...

For what it's worth, HD has only averaged a $0.60 move over the last 8 quarters the day after earnings with a movement range of [$0.32, $0.93]. In other words, HD hasn't moved a dollar off of earnings in more than two years... So maybe earnings isn't that big of a deal?...

This is trade analysis, not a recommendation.

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Deutsche Bank (DB) - What's in a Calendar?

DB is trading $41.72, up 3.4% with IV30™ down 4.4%. The LIVEVOL® Pro Summary is below.







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Deutsche Bank AG is a global investment bank. The Company offers a variety of investment, financial and related products and services to private individuals, corporate entities and institutional clients around the world.



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 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 look to the Skew Tab (below), to examine the vol diff inter-month.







We can see how the front month is elevated to the back and there is a nice little parabolic bend up in Aug to the OTM calls yielding an even larger calendar opportunity.



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).







So the stock drop is pretty obvious, and it’s likely more systematic than firm specific (duh). It is interesting to see how the implied has tracked the historical – sort of a fair vol rise. Specifically:



IV30™: 81.58

HV20: 77.18

HV180: 39.83



Obviously the long-term trend (HV180) is a bit less relevant for the next few weeks (or two weeks), but the HV20 to IV30™ comp is pretty nice and they track well.



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







I wrote about this one for TheStreet.com(OptionsProfits), so no specific trade analysis here. But, one thing to remember, a calendar trade has two greek positions that pop out to me.



1) Short Gamma

2) Long Vega



In English, greek position (1) loses to a large stock move. Is there any reason to assume that’s a salient risk? Greek position (2) loses to a drop in vol. Is there any reason to assume that’s also a salient risk? Hmmm...



For you naked put sellers, there may be some viability, as that position is short gamma but also short vega (note the difference to the calendar). It also of course carries a greater delta risk than the calendar.



This is trade analysis, not a recommendation.



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HSBC Holdings (HBC) - Put Side Calendar and Elevated Vol

HBC is trading $42.03, down 6.4% with IV30™ up 35.0%. The LIVEVOL® Pro Summary is below.







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HSBC Holdings plc provides various banking and financial products and services. Its Personal Financial Services group offers current and savings accounts, mortgages and personal loans, credit and debit cards, and payment services; wealth management services comprising insurance and investment products, and financial planning services; and consumer finance.



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 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.



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).







We can see how the front month is elevated to the back but mostly due to the downside skew. Given the market’s collapse and the industry, that’s not surprising. But the size of the vol diff is large enough to take note. As an example, the 33 strike vol diff from Aug to Sep is ~40 vol points using $0.36 as fair value for the Aug puts (mid-market is ~ $0.38).



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).







What I'm interested in here is the vol portion. Check out how high IV30™ is relative to the short-term historical vol (HV20) and the long-term historical vol (HV180). Specifically:



IV30™: 47.54

HV20: 39.86

HV180: 22.87



So the implied is elevated to the historical. Note that Aug ATM vol is priced at ~ 55 and the downside puts, well… substantially higher in Aug (and Sep). The stock has also collapsed with the market, so there is downside risk and that risk is reflected in those near-term puts (i.e. the vol).



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







I wrote abut this one for TheStreet.com (OptionsProfits) so no specific trade analysis here. But, the vol diff in the puts is interesting and potentially worth some analysis.



This is trade analysis, not a recommendation.



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Take-Two Interactive (TTWO) - A Vol Sale Amongst The Crash

TTWO is trading $11.31, up 2.2% with IV30™ collapsing 20.8%. The LIVEVOL® Pro Summary is below.



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Take-Two Interactive Software, Inc. is a global publisher and developer of interactive entertainment software. The Company’s business consists of its wholly owned labels Rockstar Games and 2K, which publishes its titles under 2K Games, 2K Sports and 2K Play.

This is an order flow note, and with all the vol moves of late, here's an interesting vol sale. TTWO has traded 19,919 contracts on total daily average option volume of just 3,592. The largest trade was a sale of 5,000 Sep 11 straddles @ 1.85 tied to $11.30 stock. Color provided by Mike Bristow of Vtrader Group and another anonymous source. The Stats Tab and Day's biggest trades snapshots are included (below).





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




Here's the news of late driving TTWO:

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The cutting-edge video game publisher behind the Grand Theft Auto and Red Dead Redemption franchises came through with softer-than-expected fiscal first quarter results last night. Its outlook for the current quarter is abysmally short of where the pros were perched. However, Take-Two is still putting out surprisingly rosy projections for all of fiscal 2012 and promising a blowout fiscal 2013.

Does Take-Two really see the light at the end of the tunnel, or is painting on a faraway smile a ploy to lure Electronic Arts or Activision Blizzard into a buyout?

Revenue fell 11% to $334.4 million, as the poorly received Duke Nukem Forever weighed down its critically acclaimed L.A. Noire release. Margins got slaughtered, with last year's adjusted profit of $0.43 a share being whittled down to a mere $0.02 a share. Analysts were banking on a tweaked profit of $0.10 a share on $352.9 million in revenue.

If you think that's bad, the current quarter is going to be even worse. Take-Two is targeting an adjusted loss of $0.55 to $0.65 a share on $70 million to $85 million in revenue. Wall Street's estimates are calling for a loss of $0.05 a share on $203 million in revenue.
Source: Is Take-Two Making Promises It Can't Keep? by Rick Aristotle Munarriz.
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This vol seller came in after earnings, and hit it pretty hard. The Skew Tab snap (below) illustrates the vols by strike by month.



Although it's sort of jagged, the shape is "normal" ish, with the downside bid relative to the upside. We can also see that the Sep 11 line (the straddle sale) is squarely in between the Aug and Dec 11 strikes. Aug 11 vol is the highest of any strike in the front three months.

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 that awesome run up in vol in TTWO which I wrote about multiple times over the last month (ish). We can also see the stock drop -- much like the rest of market, it looks like it just wants to go down and never stop (but it will).

Possible Trades to Analyze
If you're getting long vega of late, this may be one place to analyze a trade as long as the vol sale is covered and it's substantially higher than the historical measures.

This is trade analysis, not a recommendation.

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Sprint Nextel (S) - Stock Falls, Vol Rises, But Upside is the Risk

S is trading $3.25, up 3.7% with IV30™ up 0.4%. The LIVEVOL® Pro Summary is below.



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Sprint is a communications company offering a range of wireless and wireline communications products and services for individual consumers, businesses, government subscribers and resellers.

The company caught my attention because of it's recent stock and vol moves -- similar to BAC in a few ways, but also different with respect to the option markets reflection of risk. You can read the BAC article I posted on 8-8-2011 here:
Bank of America (BAC) - The Odds of the Largest Bankruptcy... Ever...

Let's start with the S 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 downward slide started with the earnings release on 7-28-2011 and has continued since then. The stock closed on 7-27-2011 at $5.16. As of this writing the stock is trading down 37% from that level. On the vol side the IV30™ has jumped from 44.30 on 7-27-2011 to now 77.98, or a 76% pop.

Let's turn to the Skew Tab.



The skew shape across all three months is similar in that the upside is bid. The option markets reflect upside risk in the stock rather than downside. This is essentially the opposite of BAC, where the skew had a "normal" shape in that the downside was bid relative to the upside.

Finally, let's turn to the Options Tab for completeness.



Another striking difference between S and BAC is that the "bankruptcy puts" are no bid for S. In fact, all the way to Nov, the lowest strike puts have no bid. The option markets reflect essentially no risk that S equity "goes away" in the next few months. Interesting...

This is trade analysis, not a recommendation.

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Bank of America (BAC) - The Odds of the Largest Bankruptcy... Ever...

BAC is trading $6.52, down 20.2% with IV30™ up 81.3%. The LIVEVOL® Pro Summary is below.



Obviously the vol (and stock movement) caught my attention. The news that's driving the company (other than the systematic risk) surrounds a lawsuit filed by AIG. Here's a quick snippet:

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AIG is planning to sue Bank of America to recover more than $10 billion in losses on $28 billion of investment in mortgage-backed securities.

Meanwhile, widely-followed hedge fund manager David Tepper of Appaloosa Management said he is selling out his BofA and Wells Fargo stakes and decreasing his position on Citigroup.
Dow Falls 300, BofA Sinks 15%; Gold Soars, by JeeYeon Park (CNBC.com)
---

So there you go. BAC is interesting in that if I look at it and am totally agnostic to the company, the vol and stock movement look like a bankruptcy stock. Of course, considering it's the largest bank in the world (or whatever), all of a sudden I feel ridiculous saying that. Let's take a look at some data.

The BAC 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).



Let's start with the stock price (upper portion). BAC opened at $10.04. Today, as of this writing, BAC is trading $6.52, or down 35.2% in a week. We can also see the stock trend. As of 6 months ago (2-8-2011) the stock closed at $14.61 -- it's down 55.4% since then.

On the vol side (lower section), we can see the IV30™ was 40.94. As of this writing, the IV30™ is 151.75, or up 271% in a week. This type of stock and vol movement is symptomatic of companies in the early stages of bankruptcy risk. Not sayin'... just sayin'... There's more to come...

Let's look to the Skew Tab, below.



I've included the front four expirations (one weekly and three monthlies). The skew shape is quite normal looking and consistent across the months. We can also see a monotonic decrease in vol as we move into further out expirations.

Let's look to the Options Tab (below).



Here's where it gets quite interesting. In the options world, a very rough estimate of a company's bankruptcy risk is to take the lowest strike puts (as long as they are below $5 in strike), and calc the MaxGain (in % terms). Subtract that number from one, and that gives you a bankruptcy probability (sort of).

Let's do this test for BAC. The Aug (monthly) 2.5 puts are priced at ~ $0.10. That means the probability of bankruptcy in the next few weeks, using this massively flawed approach, is ~4%. Using this same methodology for the Jan'12 2.5 puts, that probability rises to ~14%... or, in English, back of the envelope calculation results in the option market's reflection that there is ~ 1/7 chance BofA goes away by Jan of next year. Yeah... those are just the numbers, no assessment of "practicality." But that's still a crazy number...

Just another side note -- what were the odds that Countrywide went bankrupt?  Are those the same for BofA now that the entities have merged?... Hmm...

This is trade analysis, not a recommendation.

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Cameron International (CAM) - Elevated Vol, Dropping Stock, Calendar Spread

CAM is trading $45.62, down 4.7% with IV30™ up 11.3%. The LIVEVOL® Pro Summary is below.



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Cameron International Corporation (Cameron) provides flow equipment products, systems and services to global oil, gas and process industries.

I wrote about this company on 6-9-2011, when IV30™ was 38.92 and stock was essentially at the same spot. The note surrounded the vol, which at the time was actually elevated. Today, the vol in the front month is more than 100% higher than the IV30™ in that last article. You can read the prior post, here:
Cameron Int'l (CAM) - Elevated Vol

The stock has been on a substantial slide of late (though so has the entire market). Today, 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 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 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.

Let's start with the Charts Tab, below (6 mos.). 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 that peak on 8-1-2011 with a high price of $58.50. As of today's price the stock has fallen 22% (in eight calendar days). The IV30™ has popped from 38.30 to 64.81 in that same period which is just under a 70% rise. In other words, while the stock has slid significantly, the implied is rising faster than the underlying is moving, creating a vol difference between the implied and the HV measures. Specifically:

IV30™: 64.81
HV20: 52.17
HV180: 34.64

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).



The skew for both months is fairly flat with a slight increase to the OTM puts and a slight decrease to the OTM calls. The notable phenomenon here is the vol diff between the two months. Aug vol is priced at 82.35 and Sep is priced at 62.19. Keep those historical vols in mind (above) for a relative comparison between Aug vol and HV.

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



Potential Trades to Analyze
The front is elevated to the back but the recent stock move justifies that vol. There are a few ways to analyze this elevated vol in the front. Let's examine some.

1. Calendar spread Aug/Sep
Seems reasonable, sell the elevated Aug vol and cover with the still elevated but cheaper Sep vol. The ATM calendar is a gamma play on a stock that's moving in a market that's volatile. Using OTM calendars (two- or one-sided) is another reasonable trade to analyze.

2. Sell elevated vol
Another trade to analyze could be to sell the elevated vol in Aug while covering with OTM options in the same month. This trade gets short vega (as opposed to a calendar which gets long vega).

3. The opposite
The stock is moving, the market is moving, perhaps owning the juice in the front is worth analyzing.

This is trade analysis, not a recommendation.

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