WFC, C, MS - Option Market Reflects Elevated Risk in Financials; Domestic and Abroad

WFC is trading $23.83, up 1.3% with IV30™ down 0.8%.
C is trading $26.61, down 0.5%, with IV30™ down 1.1%.
MS is trading $14.91, down 2.4%, with IV30™ up 4.4%.

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I found all three of these stocks using the real-time custom scan that searches for high vols. The scan details are below, and then we'll look at the Charts to understand what's happening in this industry relative to IV vs HV vol comps.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 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 WFC, C and MS Charts Tabs are included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).







Looking first to the vol underlyings, we can see almost an identical pattern starting from the end of July to the present. A dip, a slight recovery, than more downward momentum. I've included a comparison chart of the stock price returns for the all three stocks over the same time horizon (6 months), below.



Red: WFC
Yellow: C
Blue: MS

We can see WFC has performed better than its peers -- the other two are broker/brokerage heavy, but all three have been market under performers down at least 25%.

Let's look to the vol side. The similarities are striking. For all three, the HV20 (short-term realized vol) was well above the implied. But now, the implied has risen as the stock prices have "calmed." It's this divergence between realized stock movement and implied vol that has the companies appearing on the high vol scan. Let's look to a vol comp over the same horizon (and same legend).



The comp reveals even more clearly the similarities between the three vols, with WFC below the other two broker heavy stocks.

Ultimately, like the discussion of DB (and Germany) earlier today (Deutsche Bank (DB) - Option Market Reflects Tripling Risk in EU's Best Economy. "Uh Oh? Or Vol Sale?"), the option markets reflect double (or more) fold risk in these stocks than in April / May. The potential for pair (or triplet) trading seems less enticing given that the firms are behaving like one stock.

The conclusion... Much like the post earlier, if you're trading these, the question becomes: Is this "Uh, oh..." Or... "a vol sale?"

I dunno, you tell me... Either way, the financials may be leading this rally / weakening (depending on where it goes).

This is trade analysis, not a recommendation.

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Deutsche Bank (DB) - Option Market Reflects Tripling Risk in EU's Best Economy. "Uh Oh? Or Vol Sale?"

DB is trading $28.98, down 6.9% with IV30™ up 0.8%. 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.

I wrote about The MSCI Germany Index (EWG) on Friday. You can read that post here: MSCI Germany Index (EWG) - New Lows, Vol Doubles, What's a Lehman Brothers?

As of this writing EWG is trading $17.46, with IV30™ up to 60.18. Both of those are new annual extrema. I've included the summary and a snippet of the Stats Tab, below.





We can see that the levels today represent a new 52 wk low in price and 52 wk high in IV30™.

Moving back to DB, I've included the same snippet of the Stats Tab, below.



Let's turn to the Chats Tab and examine the history of DB vol and price evolution. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).



Starting with the stock portion, we can see how the price flat lined for several months which pushed the HV20 to as low as 19.74. Since the end of July, the stock has been catapulting lower, falling from $55.55 on 7-26-2011 to now $28.98, or 48%.

On the vol side, we can see the IV30™ shooting passed the HV20, which itself is 253% higher than the annual low. With IV30™ at 95.34, it's 251% above it's annual low of a few months ago.

Let's turn to the Skew Tab to examine the line-by-line and month-to-month vols.



The skew itself has maintained a "normal" shape with the downside puts bid relative to the upside calls. The front is elevated to the back (we're in expo week), and the second month is elevated to the third.

Let's look to the Options Tab and note some of the price sin the downside puts.



What caught me eye is the Oct 17.5 puts. Those are priced at 126 vol. Keep in mind, DB traded at 19.74 HV a few months ago. The lowest strike puts that were bid in the second month on that day (4-14-2011) were priced at 43.96 vol. Say that out loud... 44 vol is now 126 vol in the catastrophe puts. The option market is reflecting substantially elevated risk in this company, in this country, and it's the most industrialized and advanced economy in the EU. I guess the question to ask: Is this "Uh, oh..." Or... "a vol sale?"

This is trade analysis, not a recommendation.

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MSCI Germany Index (EWG) - New Lows, Vol Doubles, What's a Lehman Brothers?

EWG is trading $17.90, down 4.8% with IV30™ up 6.6%. The LIVEVOL® Pro Summary is below.



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iShares MSCI Germany Index Fund (the Fund) seeks to provide investment results that correspond generally to the price and yield performance of publicly traded securities in the aggregate in the German market, as measured by the MSCI Germany Index (the Index).

With the market down today on concerns over, well lots of things, but partially over Europe, let's turn to the most advanced industrial economy on that continent and see what the option markets reflect. I'll review some order flow, but ultimately, it's the chart that grabbed my attention -- both the price and the vol. This ETF has breached its 52 wk low and bets are rolling in for more volatility.

The ETF has traded a little under 7,500 contracts on total daily average option volume of just 2,366. Puts have traded slightly more than calls on a 1.2:1 ratio as opposed to an average of 1:1.The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates action. The largest volume has come in the Apr'12 options, where it looks like someone bought 2,000 Apr'12 17/20 strangles for $3.70. That's a $740,000 outlay and long vega. If held to Apr expo, that trade requires EWG be outside of ($13.30, $23.70). The 52 wk range is [$18.26, $28.33]. Note that the low has been breached today.



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



The skew shows a normal shape with decided downside vol. The month-to-month term strucuture is monotonically increasing to the front months. Apr'12, though not included here, continues in that same vein -- priced the lowest of all the expos.

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).



On 7-26-11, the ETF closed at $26.77. Since then (as of this writing), it's down 33%. The IV30™ in that same time has climbed 105%. For sake of comparison, the SPY in that same time is down 13% with IV30™ up 95%. So, in English, the Geman index/ETF is down almost twice as much as the SPY with vol rising slightly more.

Possible Trades to Analyze
Every Friday leaves the looming Monday open. There's this bank rule "thingy" coming out in the UK which has exploded BCS vol up ~50% today alone. In Germany (ish), DB vol is up ~16% with the stock down another 8.1%, well into another new 52 wk low. The question (and therefore trade) really is -- do you want to sell this vol? Answer that, and you'll find any number of trades in those three names.

I did a 1x2 put spread in Oct for BCS (the Oct 6/5) betting that BCS doesn't dip below $4 to Oct expo while collecting a pretty nice premium. I mean, BCS can't go below $4, right? What? What's that you say? I've never heard of those companies... Lehman Brothers and Bear what?. We'll see...

This is trade analysis, not a recommendation.

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Travelzoo (TZOO) - Elevated Implied, Dipping Historical

TZOO is trading $33.40, up 3.5% with IV30™ up 1.3%. The LIVEVOL® Pro Summary is included below.



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Travelzoo Inc. (Travelzoo) is a global Internet media company. The Company informs over 22 million subscribers worldwide, as well as millions of Website users, about the best travel, entertainment and local deals available from thousands of companies.

I found this stock using the real-time custom scan that searches for high vols.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 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 TZOO 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 the massive stock drop off of earnings in late Jul; the stock went from $85.71 to $56.00 in a day (~34%). As of this writing, the stock is trading $33.40 -- that's a full 61% off of the pre-earnings value and 40% off of the immediate drop. But... check out the stock price since mid Aug.

On the vol side, The HV20 was as high as 182 on the stock drops, today that number is down to 83.90. In English, the realized short-term vol of the stock has come down significantly of late as the stock has finally started moving closer to its long-term trend (HV180). The IV30™, however, has been rising of late, now to just under 135 which is an annual high. Specifically:

IV30™: 134.61
HV20: 83.90
HV180: 95.80

Let's turn to the Skew Tab, below.



The ATM vol in Sep (121) is below the ATM in Oct (133) and Dec (133). Earnings may be due out right on Oct expo week. The OTM options are priced to higher vol in Sep, which is normal this close to expo.

Let's finish with the Options Tab (below).



Possible Trades to Analyze
1. Front vol sales or calendar spreads
Doing the one-sided or two-sided calendar is a reasonable position to examine. Selling the Sep 30/35 strangle collects ~$2.50 which gives a positive PnL if TZOO stock is in ($27.50, $37.50). Buying the Oct calendar covers that strangle and then owns the earnings vol in a stock that just moved $34 last earnings cycle.

This is trade analysis, not a recommendation.

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Open Table (OPEN) - Stock Drops on GOOG News, Now What?

OPEN is trading $56.91, down 9.3% with IV30™ up 8.3%. The LIVEVOL® Pro Summary is below.



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OpenTable, Inc. (OpenTable) provides solution that forms an online network connecting reservation-taking restaurants and people who dine at those restaurants. Its solutions include its Electronic Reservation Book (ERB), for restaurant customers and www.opentable.com, a restaurant reservation Website for diners.

The news driving the stock is best summed up in a quick news snippet:

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NEW YORK (AP) -- Shares of restaurant booking and review website OpenTable Inc. sank more than 10 percent Thursday after search giant Google Inc. said it was buying restaurant reviewer Zagat.

Investors may be speculating that Google will now move into the restaurant reservation business and threaten OpenTable's lead in that market.
Source: AP
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OPEN has traded over 23,000 contracts on total daily average option volume of just 5,427. While no specific line is trading the majority of the volume, and while calls and puts are about equally active, the general tenor is vol is up -- so option buying. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates the action today. We'll come back to this when we examine some potential trades to analyze.



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



We can see a normal shaped skew with the downside bid relative to the upside. A vol diff has opened up inbetween the front two months to that downside skew.

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 fading for the last few months from as high as $120 (ish) to now less than half that value. On the vol side we can see the implied has just now popped over the short-term realized and has been trading well above the long-term historical for some time.

Possible Trades to Analyze
So the question here -- is this news going to keep the stock price depressed for a "prolonged" period of time (read: more than a week and a half) or is this just a one or two day "reaction?" I dunno -- here are some trades to analyze for various outcomes:

1. Sep/Oct downside calendar
The 45, 47.5 and 50 put spreads sell 36, 32 and 22 vol points higher than they purchase, respectively, and all likely win if the stock moves to the strike but not much lower.

2. Sep/Oct upside calendar
The vol diffs are much smaller to the upside, but for a bet that the stock recovers to a certain price by Sep expo, doing that strike call calendar is an interesting trade to examine.

3. Short Sep put spreads / Long Sep call spreads
Selling OTM put spreads in Sep (which is the equivalent of buying ITM call spreads of the same strikes) bet that the stock doesn't go much lower than it already has and collects a small premium with a capped MaxLoss.

4. Diagonal calendars
On the put side, selling the higher strike in Sep and buying the lower strike in Oct is an interesting way to play trade #1, with a smaller premium paid but a larger MaxLoss.

This is trade analysis, not a recommendation.

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CONSOL Energy (CNX) - Elevated Vol, Stock Collapse, Vol Comps & Skew

CNX is trading $44.91, down 1.4% with IV30™ up 0.2%. The LIVEVOL® Pro Summary is below.



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CONSOL Energy Inc. (CONSOL Energy) is a multi-fuel energy producer and energy services provider primarily serving the electric power generation industry in the United States.

I found this stock using the real-time custom scan that searches for high IV30™ relative to short-term and long-term realized vols.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 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 CNX 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 the stock drop in early August, from $52.09 to $36.93 or a 29% drop in eight calendar days. The stock price has recovered to just under $45 as of this writing. During that eight day period in August, the IV30™ rose from 39.86 to 71.84 or an 80% increase.

While the stock has found calmer ground of late, the IV30™ hasn’t dropped as much as the short-term realized vol and that has created the vol diff that triggered the scan.

Specifically:

IV30™: 52.19
HV20: 39.83
HV180: 42.49
HV10: 32.29

Let’s delve deeper into the vol analysis by examining the skew chart and the line-by-line and month-to-month term structure.



Both of the front months show a parabolic skew, with the front month demonstrating a steeper slope to both sides. That slope difference has created an interesting vol difference – I’ve highlighted it to the downside.

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



I wrote about this one for TheStreet.com (OptionsProfits) and maybe Yahoo! Finance later today, so no specific trade analysis here. But, I will say that the position that caught my eye was a downside calendar spread. The 52 wk low in stock price is $33.34, but that was a while back. In that Aug swoon, the low price was $35.75. Having said that, the vol in the Oct downside does still feel pricey – I’d prefer it around the IV30™ or lower, which would be ~50 vol. Not sayin'... Just sayin'.

This is trade analysis, not a recommendation.

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VeriSign (VRSN) - Rumors Push Vol, Skew, Stock and Vol Comps

This was originally posted on Wednesday, September 7, 2011 and is now a case study in a three part series on option skew. You can read parts one and two by clicking on the titles below (if you haven't read them, they're brief and useful).

As I've said before, if you trade options, you are trading volatility, whether you mean to or not.

Part1: Understanding Option Skew -- What it is and Why it Exists

Part2: Trading Option Skew

VRSN is trading $34.76, up 8.4% with IV30™ up 5.2%. The LIVEVOL® Pro Summary is below.



VeriSign, Inc. is a provider of Internet infrastructure services. It provides domain name registry services and infrastructure assurance services.

The stock has been popping of late on takeover spec. Here's a quick news snippet from Forbes.com written by Eric Savitz.


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VeriSign shares are trading sharply higher for a second straight session after the company cancelled an appearance yesterday at a Citigroup technology conference.

ThinkEquity analyst Daniel Cummins reports in a research note that the company also cancelled a planned presentation at a technology conference his own firm is holding next week.

Cummins says he thinks the cancellations likely have more to do with the company’s CEO search than to potential M&A developments. He points out that the company since August has been run by Chairman and co-founder Jim Bidzos, who took over after former CEO Mark McLaughlin left to take the top job at Palo Alto Networks.

On the other hand, he also contends the company could make a good acquisition target.
Source: Forbes.com -- Update: VeriSign Rally Extends As Rumor Mill Heats Up
---

Well there you go. Takeover... Rumor... Again...

Let's turn to the Skew Tab and check out what is a very cool term structure and skew.



We can see a marked upside bid skew in Sep as the takeover rumors have pushed vol (and the stock) in the OTM calls. I've included the Skew Tab snap from 9-2-2011, below.



Awesome skew shape transformation. We can also see, when comparing the two time periods, how large a vol diff has opened up between the front month and the back two. Specifically, the Sep 36.25 calls are priced to 74 vol while the Oct 36 calls are priced to 47 vol. Said differently, Sep is 57% more expensive (in terms of vol) than Oct, and we're actually comparing a further OTM call in Sep.

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 stock rise of late. On 9-2-2011, VRSN closed at $30.01. As of this writing, it's up nearly $5 or 16%. On the vol side we can see that the short-term historical has been trading above the implied for a few weeks -- starting with the stock drop in early Aug. The short-term implieds and historicals are all sort of converging at around 50 while the long-term realized trend is substantially lower. Specifically:

IV30™: 50.74
HV20: 53.35
HV10: 47.86
HV180: 27.19

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



As one example, see the Sep $36.25 strike calls are priced to 74.29% volatility while the Oct $36 strike calls are priced to 47.39% volatility (difference =  26.90 vol points).  That volatility difference is significantly larger than the that between the Sep $32.25 strike puts at 57.97% compared to the Oct $32 strike puts at 48.41% volatility (difference =  9.56 vol points).

The upside risk reflected by the option market is substantially higher in Sep than Oct... the effect of a takeover rumor.

This is trade analysis, not a recommendation.

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Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

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Vulcan Materials (VMC) - Elelvated Vol, Stock Pop and Vol Diff

VMC is trading $35.16, up 0.8% with IV30™ down 0.5%. The LIVEVOL® Pro Summary is below.



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Vulcan Materials Company (Vulcan) is a producer of construction aggregates, primarily crushed stone, sand, and gravel. Vulcan has 319 aggregates facilities. The Company is also a producer of asphalt mix and ready-mixed concrete, as well as a producer of cement in Florida.

The stock popped with the entire industry yesterday Here’s a quick news snippet:

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Building material stocks also posted huge gains ahead of President Obama's proposal of a $300 billion job creation bill. Stocks like Vulcan Materials(VMC_), up 18%, Texas Industries(TXI_), up 12%, and Martin Marietta Materials(MLM_), up 10%, gained serious momentum
Source: TheStreet.com (Beware Stocks' Rally, Expect Volatility: Morning Call, by Evan Lazarus).
---

The vol also popped nicely yesterday on the news and now the company 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 turn to the Skew Tab to examine line-by-line and month-to-month vols.



We can see “normally” shaped skews for both months with the front elevated to the back on all strikes. There is an interesting kink the Sep 29 puts with slightly elevated vol relative to the surrounding 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).



I’ve highlighted the pop yesterday. Note also the recent 52 wk low – the stock hit below $29 in early/mid August before rebounding.

On the vol side we can see that IV30™ popped in early Aug and has stayed elevated. Interestingly, the short-term realized vol of the underlying has outpaced even that elevated implied. Specifically:

IV30™: 58.96
HV20: 68.77
HV180: 36.54
HV10: 63.48

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



I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. I will say that the vol diff to the downside looks like a reasonable position to analyze, especially taking into account the recent 52 wk low as perhaps a "line in the sand." Of course, downside calendars on the same strike or even with diagonals (or reverse diagonals) do have a delta tilt on a stock that has just recently popped on what may either by continuing good news, or just... ya know... no news...

This is trade analysis, not a recommendation.

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