Apple (AAPL) - Earnings Preview: May Be Positioned for a Volatile Move; Options Trading Sees Paradigm Shift

AAPL is trading $601.38, down small with IV30™ up 1.4%. The LIVEVOL® Pro Summary is below.



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Apple Inc. (Apple), along with its subsidiaries, is engaged in designing, manufacturing and marketing mobile communication and media devices, personal computers, and portable digital music players

This is an earnings preview for AAPL -- the largest company in the world. There are some fascinating trends in option order flow which Reuters uncovered in an article which hit the front of Yahoo! Finance, yesterday. It's very much the beginnings of a paradigm shift (I think).  I also present an argument that the stock could be volatile tomorrow, even more than the options reflect, potentially.   Of course, it's just an argument for the sake of it, please don't trade on that weakly formed hypothesis.  I'll discuss those phenomena and get into a detailed analysis of the earnings vol. But first...

... There has been some chatter about reduced expectations int earnings and the such, some of it based on an idea that customers will hold off on purchases until the new version of products coming out before Christmas. Let's read a snippet of that news, and then get look to the Charts Tab, and finally the earnings vol analysis and trading trends.

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Guidance
The consensus estimate is $10.36 for EPS and $37.18B for revenue, according to First Call. Apple has a history of posting better-than-expected results, which is why the tempered view on Wall Street comes as a bit of a surprise to some. Analysts say consumers may be holding back on purchasing iPhones now in order to wait for the next product upgrade, which appears to be coming by the end of the year. Apple guided Q3 EPS to "about" $8.68 on revenue of "about" $34B.
[...]

Analyst Views
Goldman Sachs believes the iPhone 5 will be launched on time for the all-important December quarter, and the firm continues to believe the typical pre-launch pause in demand will depress legacy iPhone sales before then. Goldman expects Q3 revenues of $35.54B and EPS of $9.98. The firm believes buy-side expectations for iPhone units are already very conservative for Q3 at 26M-27M units -- relative to its 28M unit estimate. The firm's conservatism on legacy iPhone sales extends into the September quarter but is followed by an above-consensus December quarter as iPhone 5 shipments ramp.

Source: Seeking Alpha via Yahoo! Finance; Earnings Preview: Apple , written by theflyonthewall.
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There's also a colossal lawsuit that AAPL has brought against Samsung and then the normal story surrounding earnings. I've included a link to some stories, for those interested.  I also note some stories focusing on iPad (rather iPhone) sales, though I did not include those headlines.

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Apple's $110B Cash Stash: Here's What It Can Buyat Bloomberg (Tue 12:59PM EDT)

Apple Can't Save Earnings Season, But it Can Ease the Painat The Wall Street Journal (Tue 12:58PM EDT)

Will Samsung's Galaxy Threaten the iPhone?at Motley Fool (Tue 12:55PM EDT)

The Apple-Samsung Trial: What Samsung Will Attempt to Proveat The Wall Street Journal (Tue 12:53PM EDT)

Source: Yahoo! Finance. Read the stories.
---

Let's start with the Charts Tab (one year), below. 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 the run up since the start of 2012 which peaked in early Apr and since then has stopped. The last several trading days have fallen into a sort of quiet period, which isn't uncommon for a stock heading into earnings.

On the vol side, we can see how the implied bottomed out in late Jun and has risen to now over 35% since then as earnings approach. Interestingly, while the vol did get pretty low, the realized stock movement has been below even that low water mark. As of this writing, the HV20™ is 19.06% and the HV10™ is 14.41%.

Before we get to the earnings vol stuff with comps, I've included some snippets from a great article from Reuters yesterday (yes, they used Livevol® data). The most interesting part of the article focused on the type of option volume. This is a little weird, b/c I'm quoting myself, but work with me...

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Apple's short-term options -- known as weeklys -- have been popular among retail and institutional investors. These contracts have recently accounted for an unusually large percentage of its option volume, pointing to increased speculation, possibly among investors who can play the stock at a relatively low cost compared with standard monthly options.

[...]

At the beginning of January 2012, weekly options accounted for about 11 percent of daily option volume in the S&P 500 index and 33.3 percent in Apple, according to data from options analytics firm Livevol in San Francisco.

But as of July 19, weekly options represented 17 percent of the average daily volume of the SPX and 48 percent in Apple, Livevol data showed.

"Option volume in the weeklies as a proportion of total volume has increased dramatically in both SPX and Apple and in similar percentage increases," said Ophir Gottlieb, managing director of Livevol.

"This could point to more speculative option trading if you consider shorter-term positions to be more speculative in nature," Gottlieb said.

He said a potentially troubling difference between Apple and the S&P 500 since the start of 2012 is the change in average daily volume. While SPX average daily options volume is down 7 percent, Apple options volume is up 50 percent, with weeklys accounting for 80 percent of the rise.

Apple options beckon eager investors, written by Doris Frankel.
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That weekly volume is a bit scary for the reason I stated, above. If this is mostly retail flow purchasing options, then we could see a more volatile day than expected (at least at the open). Let's get into the meat of the earnings and vol analysis. I've included details from the last eight earnings cycles below. First, the stock price moves looking at the mean and median in both actual and absolute terms.



We can see that in 4/7 cycles, AAPL stock has risen the day after earnings, with a measure of middle of about 2.0% in actual terms, and ~3.4% in absolute terms. In English, if we want to use the last seven quarters as a proxy, a best guess would be that AAPL will move ~3.5% tomorrow off of the news (up or down), which at the current price would be +/- $21.05. NB: I don't think that's a very meaningful number and certainly wouldn't use it for much of a proxy.  I also note that the Options (the weeklies) reflect a ~$33 move.

Next, let's look at the straddle values (ATM) one before and one day after earnings.



We can see that selling the ATM straddle the day before earnings and buying it back the day after was a winner 4/7 quarters (but a loser the last three quarters), for a return with measure of middle ~12.5%. I do note that for the last three quarters the straddles have moved the least (in absolute terms) of the last seven and all were positive. In English, the stock moved more than the straddle implied for the last three quarters, but the deviation from the straddle value reflected by the options market was less than the prior four quarters. Said in a meaningful way, the stock has moved much more in the last three cycles than the four prior. We can see that by looking to the stock changes, above.

Finally, let's look to the IV30™ the day before earnings for the last seven cycles.



We can see a rather large range of [27.51%, 42.49%]. I do note that the last three quarters averaged more than 35% vol, where the three quarters prior averaged ~28%. The IV30™ as of this writing is 35.27%, right in line with the average over the last seven quarters and the last three quarters.

OK, so what?...

Over the last three quarters vol has increased, the earnings move has has been bigger and now we see an explosion in the trading of the short-term weekly options. VIX has been up of late, the market has been down. AAPL has been in a relatively quiet period of late. This earnings release has the makings of a relatively large mover using the most recent data... but then again, does that data matter?

My best guess is that AAPL moves more than +/- $20 tomorrow, but I (obviously) have no idea.  What I do know is that short-term positions are growing and make up a massively larger proportion of total volume than even six months ago (two earnings cycles ago). That could mean a volatile open (at the very least).

I've included the Options Tab, below. The weekly ATM straddle is priced at ~$33, so my guess that the stock will move more than +/- $20 is rather trite in all frankness.



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Cobalt Int'l Energy (CIE) - Elevated Vol May Point to Something More than Earnings Soon

CIE is trading $22.99, down 0.7% with IV30™ up 1.3%. The LIVEVOL® Pro Summary is below.



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Cobalt International Energy, Inc. is an independent, oil-focused exploration and production company with a salt prospect inventory in the deepwater of the United States Gulf of Mexico and offshore Angola and Gabon in West Africa.

This is an elevated vol note in a stock that has earnings approaching. It's obviously not curious why vol is elevated, but rather, how much it's elevated that caught my attention.

Let's start with the Charts Tab (six months), below. 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 the gap up on 2-10-2012. The price rose from $23.90 to $31.68 or 32.6%. Here's the news behind that move:

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NEW YORK (AP) -- Shares of oil producer Cobalt International Energy Inc. surged 36 percent Friday after the company released a study showing that one of its wells might be far more productive than many analysts thought.

THE SPARK: On Thursday, Cobalt International released the results of test drilling at the company's "Cameia-1" well off the coast of Angola. Cobalt International said the well yielded "exceptional results" and will be able to produce 20,000 barrels of oil per day.

THE BIG PICTURE: The Cameia-1 well is just the beginning of Cobalt International's efforts to drill oil off the western coast of Africa. The company said it has plans to drill even deeper wells now that Cameia-1 has proven to be so productive.

When a well proves to be surprisingly productive, it's like winning the lottery for an oil company. Firms like Cobalt International invest in drilling leases and exploratory wells without knowing how much fuel they will produce.

Source: AP via Yahoo! Finance; Cobalt International up 36 percent on well results.
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The firm released earnings a couple of weeks later and fell on the results. Here's that news:

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Cobalt International Energy Inc. (CIE), the deep-water oil explorer whose largest investors include Goldman Sachs Group Inc. (GS), fell the most in two months after posting a fourth-quarter loss almost twice the average estimate.

The shares declined 6.1 percent to $31.97 at the close in New York. Before today, the stock had more than doubled in the past year as Cobalt announced discoveries off the coast of Africa and in the Gulf of Mexico, including a field the company said may hold 1 billion barrels of crude.

Cobalt’s loss widened to $51.1 million, or 13 cents a share, from $29.8 million, or 9 cents, a year earlier, the Houston-based company said today in a Business Wire statement. The average of 10 analysts’ estimates compiled by Bloomberg was for a per-share loss of 7.4 cents.

Source: Bloomberg via Yahoo! Finance; Cobalt Tumbles on Bigger-Than-Expected Loss: Houston Mover, written by Joe Carroll.
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Even with that news, we can see that the stock found a quiet period following earnings. Fast forwarding to today, we can see again that the stock is in a sort of quiet period -- it's been declining, but steadily and without any gaps.

Turning to the vol side we can see a number of phenomena:

1. The implied has been rising since 6-22-2012, from 61.21% to 109.60% or 79%. The 52 wk range in IV30™ is [46.41%, 111.52%], putting the current level in the 96th percentile.

2. As the implied has been rising, the short-term and long-term historical realized vols have been declining. In English, the stock has been less volatile of late while the options have been pricing in more vol. The next earnings date for CIE is in early Aug, so the rising vol makes sense. However, the vol hasn't been rising since 6-22-2012 solely b/c of earnings and I don't believe it's at an annual high solely b/c of earnings either. For the last seven earnings cycles the vols on the day before the news have been:

Nov 2010: 58%
Feb 2011: 51%
May 2011: 43%
Jul 2011: 55%
Nov 2011: 79%
Feb 2012: 84%
Apr 2012: 62%
Jul 2012: 109%

3. The annual high in the implied was reached outside of an earnings event as the numbers above confirm.

It's those numbers from the last several earnings reports that caught my attention when compared to the current implied. Tricky...

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



We can see the rather substantial vol difference between the front three months. Given that earnings are approaching, the difference between the front and month 2 makes sense -- the difference between months 2 and 3 though seems a bit large. The near-term risk feels elevated beyond an earnings report.

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



Across the top we can see the monthly vols are 112.83%, 93.39% and 84.82% for Aug, Sep and Oct,  respectively. The earnings date listed in there is just a projection and I believe it's a touch early. In any case, something is coming for CIE, quite possibly a report on a well that could have an impact like we saw in Feb of this year (note that there is two-tailed risk, not just upside potential).

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Nexen (NXY) - Pre-Takeover Order Flow Looks Like Insider Information; How to Make $32 million (3,200%) in a Week

NXY is trading $26.06, up 52.7% with IV30™ down 17.7%. The LIVEVOL® Pro Summary is below.



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This is a quick note on some very suspicious order flow in NXY before the takeover news, announced today. First, the news:

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Cnooc: China’s Cnooc unveiled what would be Beijing’s biggest deal yet for energy resources abroad, with a $15.1 billion pact to acquire Canada’s Nexen.

Source: WSJ via Yahoo! Finance; Deals of the Day: Cnooc Reveals Big Deal for Nexen
---

Let's get right into the suspicious trading. First, I've included a small snippet from the Stats Tab, below, to establish the "average."



We can see that the average daily option volume is ~1,500 contracts a day. Note that if I take out the three days that I'll be discussing, that average is actually just 387 contracts a day.

On Friday (the last trading day before today), some enormous volume came into the Dec options.

I've included the Options Tab from Friday along with the largest trades of the day, below.



Specifically we can see that ~20,000 Dec 19 calls were purchased and funded by a sale of ~10,000 Dec 16 puts. The total cost of the 20,000 x 10,000 was ~:

20,000*$0.88*100 - 10,000*$1.21*100 = $550,000 (or $0.55 for 10,000 2x1 risk reversals)

I've included the the Options Tab from today, below.



Those puts sold are now worthless and the calls are worth ~$7.30. In total, that positions is now worth $14.5 million for a $14 million win (2,800%) in one trading day.

Honestly, that's really enough to complete the article, but there's actually more. A lot more.

On 7-16-2012 and 7-17-2012 20,000 more risk reversals traded in Sep. I've included the Options Tabs from those two days, respectively.





We can see the Sep 16/17 risk reversal (selling puts to buy calls) ~20,000 for an average price of ~$0.15 or a $450,000 outlay. Looking back to the Options Tab for today (above), that position is now worth $18 million for a $17.55 million win or 3,900% percent in a week.

In total on those three days, 70,000 contracts traded representing 6,000% of daily option volume and profited more than $32 million on an outlay of $1 million. I also note that on two of those three days (7-16 and 7-20), the stock volume was right around the average, so it doesn't look like the options trades were tied to stock.

This is probably the most compelling / suspicious order flow I have seen in a takeover in several years. In fact, it's so suspicious and so large, it poses the only real doubt I have that perhaps something else was at play. If the trades were done at 1/10 the size, so $100k turned a $2.5 million profit, I would be screaming bloody murder, but this is so big I almost doubt my suspicion...

I said almost...

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Monster Beverage Company (MNST) - Vol Explodes 60%; Vol Diff Expands in Calendar

MNST is trading $64.50, down 4.9% with IV30™ up 30.1%. The LIVEVOL® Pro Summary is below.



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Monster Beverage Corporation, formerly Hansen Natural Corporation, is a holding company. The Company develops, markets, sells and distributes alternative beverage. The Company’s category beverages brand names include Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, X-Presso Monster, Worx Energy, Peace Tea, Hansen’s, Hansen’s Natural Soda, Junior Juice, Blue Sky, Hubert’s and Vidration.

This is a vol note in a stock that has been declining of late -- but the vol move today is odd in that... I don't see the news driving it.   Let's start with the Charts Tab (six months), below. 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 a nice orderly rise in equity price from six months ago to mid June. The stock went from $52.26 (1-20-2012) to $78.72 (6-18-2012), or a 50.6% increase. However, since Jun 18, the stock is down 18%, and in the last two days the stock is down 10%.

On the vol side, we can see an abrupt rise in the implied as of yesterday which has continued well into today. IV30™ closed at 43.84% on 7-18-2012, rose 10.21 vol points or 23.3% yesterday, and is up another 16.28 vol points or 30.1%, today. The news is... I don't know... I read that there was a pretty rough article on Seeking Alpha discussing MNST's valuation, but that doesn't seem like news that would take vol up from 43.84% to 70.33% in two days (60%)... right?

Let's turn to the Skew Tab.



We can see how elevated Aug is to Sep -- note that the next earnings release for MNST is fast approaching and will be in the Aug cycle. Fair enough, vol should be elevated in Aug to Sep -- but check this out. I've included the Skew Tab from 7-18-2012, below.



In this pic, we can see that while Aug was elevated to Sep, it wasn't nearly as large a vol diff as there is today. The time spread opened up yesterday and has expanded today.  In other words, whatever the news was yesterday, it's having a greater effect today on vol today.

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



Across the top we can see that Aug is priced to 71.33% up 17 vol points today, while Sep is priced to 52.80%, up 8.8 vol points. Yesterday, Aug vol rose 10.5 vol points while Sep rose just 3.0. In English, the 7.5 vol diff expansion yesterday and ~9 vol point expansion today have created a substantial vol difference between Aug and Sep -- and the earnings cycle is does not seem to be the only (or even primary) reason for it.

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OCZ Technology (OCZ) - Takeover Spec Following Bad Earnings Pushes Vol to New Highs; Skew Bends to Calls

OCZ is trading $5.70, up small with IV30™ up 13.9%. The LIVEVOL® Pro Summary is below.



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OCZ Technology Group, Inc. (OCZ) designs, manufactures, and distributes solid-state drives (SSDs) and computer components.

This is a price and vol note in a stock that has seen some abrupt moves in just the last week while vol continues to rise. Let's start with the Charts Tab (six months), below. 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 two gaps, one down and one up in the last several trading sessions. I've included news snippets from those two days, below:

7-11-2012: Stock went down from $5.45 to $4.50 (-%)
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(Reuters) - Shares of OCZ Technology Group Inc (OCZ.O) fell as much as 20 percent on Wednesday after the solid-state device maker reported first-quarter results below analysts' estimates.

At least five brokerages, including Piper Jaffray and Needham & Co, cut their price targets on the stock.

The company reported a bigger-than-expected quarterly loss on Tuesday, citing supply chain shortages.

Source: Reuters via Yahoo! Finance; OCZ Technology shares fall on weak results, written by Neha Alawadhi in Bangalore; Editing by Sriraj Kalluvila.
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7-19-2012: Stock was up from $4.56 to $5.61 (+%)
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(Reuters) - Shares of OCZ Technology Group Inc spiked as much as 21 percent in early trade on a report that larger rival Seagate Technology Plc has offered to buy out the solid-state hard drive maker.

Fudzilla.com, a hardware industry blog, reported on Thursday that Seagate is considering acquiring OCZ to boost its solid-state drive (SSD) product portfolio. The website said a deal could be announced as early as next week.

Seagate declined to comment on the report and OCZ could not immediately be reached.

Source: Reuters via Yahoo! Finance; OCZ shares surge on buyout report, written by Sruthi Ramakrishnan.
---

So there we have it -- poor earnings offset by a takeover rumor. The 52 wk range in stock price for OCZ is [$4.14, $10.15].

On the vol side, we can see how the implied rose into earnings and then fell (both of those phenomena are perfectly normal). Since that initial drop off of earnings, vol has risen again. In fact, the current level is a new annual high with a 52 wk range of [50.75%, 128.07%]. Note by how much the annual high has been breached, today.

The vol picture gets even more interesting when we look to the Skew Tab from today and two days ago. Let's start with today:



We can see how elevated the front month is to the two back months and we can also see an upward bend to the OTM calls in Aug, unlike the other two-months. This is a beautiful illustration that the option market reflects greater upside risk (potential) in the near-term (to Aug expiry) than to the back two months, as well as overall risk (overall vol).

Out of curiosity, I wanted to look at the skew a couple of days ago -- before the takeover rumor. I've included that image, below.



Don't let the colors confuse you -- this chart is Aug and Sep. Note how the two months laid on top of each other just two days ago. While we saw above (the skew chart from today) that the near-term risk reflected by the options is substantially elevated to the medium-term, from the comparison of these two two charts we can see that the takeover spec has been the catalyst to this risk premium shift. In English, the takeover spec has pushed risk (vol) higher across the board, but most notably in the front month, affecting not only the overall vol level, but the upside risk (potential).

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



We can see the vols across the top are 147.06%, 122.66% and 96.44%, for Aug, Sep and Dec, respectively. Noting that the prior IV30™ high (before the takeover rumors) was 119.63% (the last earnings vol), we can see that both Aug and Sep are priced above that high water mark. The spec feels like it has legs -- whether or not anything comes of it, it's likely the vol does "something" soon -- up or down. Of course, the stock may well do "something" soon too. On a broader note, in general takeover spec is a whole lotta nothing. Of course, sometimes it isn't nothing.

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EDU - Is China Collapsing into a Fraud Epidemic... Just Like the US?

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EDU is trading $13.52, down 7.5% with IV30™ up 41.7%. The LIVEVOL® Pro Summary is below.



New Oriental Education & Technology Group Inc. is a provider of private educational services in China based on the number of program offerings, total student enrollments and geographic presence.

This is a vol and stock price note on yet another Chinese company embroiled in a potential accounting fraud with an abrupt single day stock decline. But, there's more to this story line now -- China is slowing down, and that's not fraud, that's just scary.

Further, I postulated in late September of last year:
Is China A State Backed Accounting Fraud Epidemic? (click the title to read the article).

9-29-2011
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Chinese stocks are getting crushed today, partly because of a report that the US government’s investigation of their accounting is gaining some muscle power.

[...]

Many of these names have already been hammered on such concerns for several weeks now. Some of them have political risk at home to contend with, too, along with growing worries about the strength of China’s economy.
Source: Chinese Stocks Crushed on Report of DOJ Probe
---

To get a better handle on the macro picture for China as of right now, I highly recommend reading my post on Thursday of last week:
Has the Chinese Apocalypse Started? Is China on the Cusp of a Deflationary Vortex?.

Bottom line, there is a non-trivial chance that both things are equally true: China could be in a fraud epidemic and China could be in a deflationary vortex.

Just to be clear, I'm not singling China out here -- quite the contrary, in fact. Human nature is human nature and if the history in the United States is any lesson, when a big bubble boom goes bust, fraud hits hard (remember Enron, WorldCom, Global Crossing, Arthur Anderson, Health South, etc?). Would I be unfairly picking on China for wondering if something similar is happening there (now), or would I be unfairly not picking on China if I didn't say it?

So is the single greatest catalyst to world wide economic growth in fact headed into a downward economic spiral and a fraud epidemic? That's not crazy talk, that's market talk... of course, it might not be true -- neither of them. In fact, there's a better chance that neither are true than the worst case scenario, right?

I'll get some other macro data points into this article, but ultimately I'll also focus on EDU, in particular. Let's start with the Charts Tab (one year), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



On the stock side, I've highlighted the massive decline in late Sep as well as the drop two days ago. Here is the relevant news for the recent drop:

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New Oriental Education & Technology Group Inc. (EDU) tumbled the most on record, leading declines in New York-traded Chinese stocks, after the company said the U.S. regulator started a probe into the consolidation of its units’ financial statements.

New Oriental said yesterday the Securities and Exchange Commission is investigating its accounting practices, the second Chinese company in a month incurring a regulator probe. The SEC ordered on June 29 a two-week trading suspension of China Medical Technologies Inc. (CMEDY), citing questions on the accuracy of reported information. Sino-Forest Corp. filed for bankruptcy in March after it was accused by a short-seller of misstating business and assets.

Source: Bloomberg via Yahoo! News; New Oriental Leads Tumble on SEC Probe: China Overnight, written by Belinda Cao.
---

Ugly stuff... Two days ago the stock closed at $22.26 and one month ago the stock closed at $27.33. As of this writing the stock is down 39.3% in two days, and 50.5% in a month.

Turning to the vol side, we can see the explosion over the last two days. What's interesting is that while vol popped from 68.27% to 93.53% (37%) yesterday, its up another ~42% today to 132.54% -- so, the vol rise is larger today both in absolute and relative terms. And there isn't any "new" news... Gulp...

In fact, as I'm writing this, the IV30™ is now up 64% to 153.28. And now I see why:

---
11:55 EDT New Oriental Education initiated with a Strong Sell at Muddy Waters

Source: theflyonthewall.com via Yahoo! Finance; New Oriental Education initiated with a Strong Sell at Muddy Waters
---

Sorry, that was real-time blogging (sort of...). In any case, the Muddy Waters point of view isn't exactly new either.

As I mentioned earlier, aside from the accounting irregularity accusations, there is a macro picture for China that is quite disturbing, and in many ways equally disturbing as a potential fraud epidemic. While I directed you to the prior blog about China's deflationary trend, here's a snippet from yet another article that points to the same macro gloominess:

---
BEIJING (AP) -- Some of China's biggest companies, from tech giants to airlines and retailers, are warning of unexpectedly sharp drops in profit of up to 80 percent, adding to pressure on Beijing to reverse a painful economic slump.

[...]

Forecasters say the slowdown might have bottomed out after growth fell to a three-year low of 7.6 percent in the second quarter but the timing and strength of a rebound are uncertain. Premier Wen Jiabao warned last weekend a recovery was not yet stable. On Tuesday, he said the employment outlook "will become more complex and severe."

"Economic growth will be unstable for the next six or even 12 months at quite a low level," said Zhang Jiuhui, an analyst for Great Wall Securities in Beijing.

Beijing has cut interest rates twice since the start of June and is pumping money into the economy through spending on building low-cost housing and other public works. It is trying to use targeted measures instead of flooding the economy with money after a binge of spending and bank lending that helped China rebound quickly from the 2008 crisis fueled inflation and a wasteful building boom.

Source: AP via Yahoo! Finance; Chinese companies see profits plunge amid slowdown
---

Let's turn to the Skew Tab for EDU, to get a feel for the month-to-month and line-by-line vols. I included two snapshots -- one with the front month included and the other with it excluded (to see the back two months on a better scale).





We can see the front is extraordinarily elevated to the back, priced at ~245% as of this writing. Looking to just the second and third expiries, we can see how the skew has retained its "normal" shape, and it makes sense that the second month is above the third given the short-term risk as these accusations and an SEC inquiry move forward.

To read about option skew, you can go here:
Understanding Option Skew -- What it is and Why it Exists.

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



We can see the monthly vols are priced to 245.10%, 132.54% and 113.16%, respectively. The lowest strike in Jul is $12 -- it would have been in interesting to see how the disaster puts would have been priced with just 2.5 days left to expo. My guess is that a $5 strike may have been bid, and it certainly would be in Aug.

Ultimately, as a single stock story, this is compelling but hardly macro. I still believe there is a gigantic macro risk (gigantic wrt to downside potential) -- albeit a small probability -- that has not been priced into the market yet.  If the risk is digested, VIX could hit above 40 by the end of the year.  Of course, some good economic numbers (or even stable numbers) from China could totally alleviate that risk.  Just to be clear, I'm not predicting a 40 VIX, I just think 16 feels kinda... absent minded?...
This is trade analysis, not a recommendation.

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Affymax (AFFY) - Biotech Pops 42%, Earnings Approach, But Vol is... Depressed?

AFFY is trading $16.96, up 3.5% with IV30™ down 4.6%. The LIVEVOL® Pro Summary is below.



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Affymax, Inc. is a biopharmaceutical company engaged in developing drugs to improve the treatment of serious and often life-threatening conditions. Its product candidate, peginesatide, is for the treatment of anemia in chronic kidney disease patients on dialysis.

This is a vol note on a bio-tech that's been rallying of late with earnings due out in Aug... oddly, I'm noting depressed vol.

Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



Check out the recent run on the stock side, where the price has risen from $11.95 to $16.96 or up 42% in just four trading days. Here's the news that appears to be driving AFFY, which has breached another 52 wk high, today:

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Since Omontys' approval was already priced into Affymax's soaring stock price, its big move last week came on news that a major dialysis-focused medical provider would begin using the drug in its facilities. That should juice earnings going forward, as Omontys' biggest X factor is its ability to compete with Amgen's (Nasdaq: AMGN) market-leading anemia drugs, Aranesp and Epogen.

Source: The Motley Fool via Yahoo! Finance; Can This Biotech Stock Keep Booming?, written by Alex Planes.
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I'm OK with that reasoning behind the stock rise, but then why has it been in steps? Here are the closing prices over the last five trading days (using the snapshot today as my artificial close).

7-11-2012: $11.95
7-12-2012: $14.24
7-13-2012: $16.49
7-16-2012: $16.39
7-17-2012: $16.96

Turning to the vol, we can see how elevated the implied was in late Mar (FDA approval "stuff"). As of right now, however, the vol is actually quite low relative to the past. I've included an annual chart, below, with the same legend.



Looking at this longer time horizon, we can see how elevated the vol was in mid November -- incredible really, and quite common to small cap bio-techs. The 52 wk range in IV30™ is [54.74%, 291.71%], putting the current level in the 5th percentile. Obviously, that percentile number is a little misleading given the prior news, but then again the stock moved 35.7% in early Dec off of that vol event, then 4.2% in late Mar, and now has moved more than 40%. Again, it's that trail upwards (rather than gapping) that has been... attention grabbing.  And earnings are around the corner...

Let's turn to the Skew Tab.



I've excluded Jul since there really aren't very many options to chart (we only chart options with a bid). We can see that Aug lies on top of Oct -- there's likely an earnings event in the Aug cycle. That kooky spike in the Oct skew is in fact simply reflective of very wide markets (we use mid-market as the theo in LVP; more granular theos are allowed in LVX™ (Livevol Execution)). If you want to get a sneak peak at LVX (and opening a brokerage account), please e-mail support@livevol.com with EXACTLY the following:

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



Across the top we can see that the Aug vol is priced to 68.71% -- again, it feels kinda low given the recent stock movement and that earnings are due out (I think), no?...

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Focus Media (FMCN) - Chinese Media Vol Rises With Stock Drop; Immediate-tem Risk Elevated

FMCN is trading $17.84, down 4.8% with IV30™ up 9.0%. The LIVEVOL® Pro Summary is below.



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Focus Media Holding Limited (Focus Media) is a multi-platform digital media company, operating liquid crystal display (LCD) display network in the People’s Republic of China using audiovisual digital displays in commercial and residential locations.

I wrote about FMCN just eleven days ago and noted the depressed vol in what appeared to be a "risky" stock in that it had substantial firm-specific and systematic risk. You can read the older post here:
Focus Media (FMCN) - Gapping Chinese Stock with Multi-layered Risk Shows Depressed Vol...?... .

I've included the Symbol Summary from that day, below. Note the vol and stock changes today from the Summary below (just eleven days ago):



Today I note the calendar vol diff that has opened up in FMCN between this expiry (with just four days to go) and the back months to coincide with the recent vol run up and stock decline. Let's turn to the Charts Tab, first, then look to the Skew. 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 the drop of late. The troubling thing is that I don't really see any news on the firm during this downtrend. Nonetheless, the stock is now at a six month low. Not shown on this chart (but still relevant), is the massive decline seen on 11-21-2011, when the stock dropped from $25.50 to $15.43 or down 39.5%. Even more "scary" was the low reached on that day of $8.79 (a 65.5% drop). That cataclysm was based on a Muddy Waters report. Here's a news snippet from that day:

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Focus Media halted after plunging 62% following Muddy Waters report (9.57 -15.92) -Update

Source: Provided by Briefing.com (www.briefing.com)
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On the vol side, we can see that the implied has been rising in lock step with the stock decline. IV30™ has risen from 51.12% to 75.93% or a 48.5% increase in just the eleven days since the first blog post. Even with this rise, the implied is below the long-term historical realized vol and is in the 24th percentile on an annual measure. In English, while the vol is up a lot of late, it's been much higher this year and is still well below the long-term historical realized movement of the stock.

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



Now we an see how elevated the front expiry is relative to the back. While there are only four trading days left until expiration, the vol level in the Jul options does present some non-trivial option premiums. The option market reflects substantially elevated risk in the very near-term -- and the recent stock drop proves the relevancy of that measure.

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



Across the top we can see the monthly vols are priced to 90.63%, 75.93% and 71.24% for Jul, Aug and Oct, respectively. In terms of vol differences, note that the Aug/Jul 17 put spread and Aug/Jul 19 call spread show 20 point and 15 point vol spreads, respectively.

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Best Buy (BBY) - Risk Rises After Restructuring News; Vol Term Structure is... Interesting...

BBY is trading $18.86, down 0.7% with IV30™ up 1.4%. The LIVEVOL® Pro Summary is below.



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Best Buy Co., Inc. is a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services.

This is a vol note both due to rising (elevated) vol and a really interesting term structure vol difference.  So, two vol phenomena to examine.  Let's start with the Charts Tab (six months), below. 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 the decline since late Mar, when the stock was trading just below $28. Looking a bit more myopically to the recent trend, we can also see a dip from $22 to now below $19 in just the last two weeks (ish). There has been some important news of late in BBY. I've included a snippet, below:

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On the heels of saying it would lay off 600 Geek Squad workers, Best Buy Co. Inc. says it will hire 500 skilled employees for the unit.

[...]

The new Geek Squad jobs will focus less on repair and more on higher-skilled activities, such as working with small businesses.

On July 6, Best Buy announced it would lay off 2,400 employees nationwide, including 600 Geek Squad employees. Those layoffs were expected to conclude by Aug. 1.

[...]

In March, the electronics retailer announced plans to close 50 stores and lay off 400 people by 2015.

Source: Kansas City Business Journal via Yahoo! Finance Best Buy will hire 500 skilled Geek Squad workers, written by Brenna Hawley, Web Reporter.
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Looking to the vol, we can see the implied rising as the stock has been dipping. Other than the vol reached into the last earnings report (highlighted), this would be an annual high in IV30™. To get a better look at the vol over the last year, I've included an IV30™ chart over the last twelve months, below.



I've drawn in that horizontal line to help illustrate the level today relative to the past year. In certainly appears that the restructuring news has been digested by the option market as increased risk (increased vol). This elevated vol was the first of two phenomena I noticed in BBY.

Let's turn to the Skew Tab to examine the line-by-line and month-to-month vols. Here we'll see the second vol phenomenon.



We can see that the front month (week) is elevated to the back two. I note that the next earnings release for BBY could be in the Sep cycle (and just outside of Aug). We can see that Sep is elevated to Aug, but it's quite curious how elevated Jul is to Sep (even with expo this close the difference is pretty large). Tricky...

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



Across the top we can see the monthly vols are 68.32%, 57.38% and 61.26%, respectively for Jul, Aug and Sep. Let's just say, if earnings are in fact in Sep (but not Aug), then, ya know, there is some cool stuff going on here.

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