Interpublic Group (IPG) - Takeover Rumors and Denial Bend Skew; Vol Diff Opens

IPG is trading $10.60, up 2.3% with IV30™ up 1.5%. The LIVEVOL® Pro Summary is below.



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The Interpublic Group of Companies, Inc. (Interpublic) is a global advertising and marketing services companies. Interpublic’s companies specialize in consumer advertising, digital marketing, communications planning and media buying, public relations and specialized communications disciplines.

This is a vol term structure note on a company that has had a volatile ride in the last couple of weeks from an earnings announcement and then a takeover rumor and subsequent denial. IPG 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.

I want to start with the Charts Tab (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 abrupt drop off of earnings on 7-26-2012 (report was BMO). The stock fell from $10.99 to $9.90 or down 10% in a day. Then, on 8-3-2012, the stock popped from $9.68 to $10.97 or a 13% rise on news of a potential takeover bid from an European rival. Here's a news snippet from that day:

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(Reuters) - French advertising agency Publicis Groupe (PUBP.PA) is weighing a bid for U.S. rival Interpublic Group (IPG.N), said a report by FT Alphaville on Friday, sending Interpublic's stock sharply higher.

Publicis is weighing a bid which could be worth at least $6 billion, FT Alphaville said quoting "usually knowledgeable" sources on Friday.

An equity valuation at that level would represent a premium of over 40 percent to Interpublic's market value on Thursday.

Source: Reuters via Yahoo! Finance Interpublic boosted by report Publicis weighing bid, reporting by Lionel Laurent in Paris, Sruthi Ramakrishnan in Bangalore, Jennifer Saba in New York; Editing by Mark Potter, Lisa Von Ahn and Sreejiraj Eluvangal.
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On the vol side, we can see drop in the implied off of earnings (normal) and then the spike from the takeover rumor. The vol fell after the rumor on 8-6-2012 b/c of this news:

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Aug 5 () - French advertising agency Publicis said it had not held talks with U.S. rival Interpublic Group, formally denying a press report that had boosted Interpublic's shares by 13 percent on Friday.

Source: Reuters via Yahoo! Finance; Publicis says held no acquisition talks with Interpublic
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The stock fell from $10.97 back to $10.11 on 8-6-2012 (the first trading after the takeover rumor).

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



We can see two obvious phenomena here:

1. The front month is elevated to the back as the option market reflects greater near-term risk than intermediate-term.

2. The upside skew in IPG is bid -- the option market reflects greater upside risk (potential) than downside risk in the near-term.

I've included the Skew Tab from 8-2-2012 as a reference point, below.



We can see that only one OTM option was even bid in Aug (thus the single data point dot rather than a curve). We can also see that the months were priced to pretty similar vol (overall). In other words, this takeover rumor (and subsequent denial) have affected the skew in a very real way.

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



We can see across the top that the monthly vols are priced to 57.18%, 46.25% and 43.70% for Aug, Sep and Oct, respectively. Notice how much that vol diff opens up when looking to the Aug/Sep 12 call spread. That's the affect of the takeover "stuff."

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