optionvol-NBC-Bay-Area

SWY is trading $20.65, up 2.3% with IV30™ up 22.8%. The LIVEVOL® Pro Summary is below.



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Safeway Inc. (Safeway) is a food and drug retailer in North America. As of December 3 1, 2011, the Company had 1,678 stores.

I found this stock using a custom scan searching for names where IV30™ is up at least 10% on the day. This is a takeover rumor name with earnings likely in the second month, making for an interesting vol set-up. The implied in this name has been up nearly 75% over the last four weeks and today's news adds to that trend pushing IV30™ to nearly a double since 3-19-2012.

The scan details are below with a snapshot if you want to build it yourself in Livevol® Pro.

Custom Scan Details
Stock Price GTE 10
Average Option Volume GTE 1,200
Days After Earnings GTE 5 and LTE 60
IV30™ Percent Change GTE 10%
IV30™ GTE 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.



Let's start with the news today that's pushing vol today:

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Rumor Round Up

* Safeway (SWY) spiked higher following takeover rumors.

While many rumors circulate during the day, and the validity of the source of these rumors can be questionable, the speculation may increase volatility in the near term.

Source: Provided by Briefing.com (www.briefing.com)
---

The SWY Charts Tab is included below and helps illustrate the awesome vol climb of late. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



Starting with the stock price portion, we can see how the underlying has climbed from the mid $17 level, to now over $20.50. But, it's the vol portion that is so interesting. I've highlighted the recent run up, but if you look to mid Mar, we can see how the implied actually hit its annual low on 3-19-2012. From that point, the vol has gone straight up and is now in the 72nd percentile (annual). The 52 wk range in IV30™ is [20.08%, 45.39%].

The implied is now well above both of the historical measures. The vol comps are:

IV30™: 38.51%
HV20™: 23.23%
HV180™: 31.98%

The Skew Tab (below) illustrates the vols by strike by month and uncovers another interesting phenomenon.



Check out how elevated Apr vol is to the back months, and in specific, to May. The last two earnings releases for SWY in calendar Q2 were 4-29-2010 and 4-28-2011. It's a reasonable bet that the next earnings release for SWY will be in the May expiry and outside Apr. That means that the depressed vol in May (relative to Apr) has an embedded vol event.

I was wondering how much the rumor today moved the skew, specifically wrt the Apr to May comp. I've included the Skew Tab snap from yesterday, below.



We can plainly see how the front month was in fact depressed slightly to May as of yesterday's close, and how much the rumor has changed that term structure relationship. Come on, Livevol® Pro is pretty awesome, no?...

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



Putting numbers to the images, Apr vol is priced to 45.52% (that's above the annual high in IV30™) while May is priced to 38.51%.

This is trade analysis, not a recommendation.

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GOOG is trading 643.58, up 1.2% with IV30™ down 5.9% as of ~10:05am EST. The LIVEVOL® Pro Summary is below.



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Google Inc. (Google) is a global technology company focused on improving the ways people connect with information. The Company generates revenue primarily by delivering online advertising. As of December 31, 2011, the Company’s business was focused on areas, such as search, advertising, operating systems and platforms, and enterprise.

Duh...

Let’s keep it simple -- this is an earnings note on GOOG on the last trading before the calendar Q2 report. The current vol level is not trivial in that there is a substantial and unambiguous risk premium statement reflected by the options relative to the past and I’m going to show how to find it. And, with weekly options expiring tomorrow, we have a precise measure of the option market’s pricing of the one day earnings move.

First, 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 last two earnings moves (down $53.58 or 8.4% on 1-20-12 and up $32.69 or up 5.8% on 10-14-2011). Now look to the vol portion, and specifically the implied. For the 10-13-2011 cycle, IV30™ hit 43.09% and on 1-19-2012, the IV30™ hit 48.23%. The IV30™ today is just 31.37% and is down today.

But that’s just the beginning. Let’s take an eight quarter look back window using Livevol® Excel. The details and stats are included below.



That’s a lot of info, so let’s break it down into means and medians.

In terms of one day straddles, buying the front month straddle the day of earnings and selling on close the next day was a winning strategy six out of the last eight quarters. The average return was 62.8% and the median was 71.7%. Looking more closely to the most recent quarters, we can see the one day trade was a winner once and loser once, while the win was substantially larger than the loss.

IV30™
Day before IV30™ mean (eight quarters): 34.60%
Day before IV30™ median (eight quarters): 31.65%
Day before IV30™ mean and median (two quarters): 45.66%

So, in English, we can see that other than the last two quarters, the current IV30™ is almost identical to the median over the last eight quarters.

Taking a more holistic approach, we can see that the last two earnings cycles are sort of on an island – priced to higher vol than the six quarters before. The vol today looks more like the six quarters prior than the most recent two quarters.

One-day Stock Moves
Absolute Mean (eight quarters): 7.95%
Absolute Median (eight quarters): 7.93%

It’s comforting to see that incredibly close tracking of mean to median simply in that it shows us we may have a reasonable measure of middle. In English, over the last eight quarters, GOOG stock has moved just under 8% in the day immediately following earnings. The standard deviation of the absolute moves is 3.11%. That's evidence that the measure of middle is in fact potentially meaningful -- but keep this mind when looking to the analysis to follow.

Let’s turn to the Skew Tab and then the Options Tab to complete the analysis.



I’ve purposely included the weekly options expiring tomorrow. We can see the beautiful and monotonic elevation in vol from the back to the front. This is normal and expected behavior. But, with the weeklies expiring tomorrow, we have a precise measure of option market pricing for the one-day move. Knowing that the stock has averaged ~8% a day over the last eight quarters, let’s look to the reflected risk now. The Options tab is included below.



To be as precise as possible, we’ll use the $643.58 spot as of this writing, which is 28.4% the 640 strike and 71.6% the 645 strike (0.284*$645 + 0.284*$640 = $643.58). The ATM straddle then is priced to:

ATM straddle = 0.284*($21.10 + $17.70) + 0.716*($18.6 + $20.25) = $38.84

And finally, turning that into a percentage of stock price:
$38.84/$643.58 = 6.03%

So, for those that are number averse or simply don’t have the time to follow that stuff, the option market is pricing the one day earnings move AND the rest of Thursday’s move as 6.03% when over the last eight quarters the single day move has averaged (and in median) 7.95%. Keep in mind the stock has already moved 1.2%, so Thursday's piece of the ATM straddle isn’t trivial.

Conclusion
I wrote about this one for TheStreet (OptionsProfits), so no specific trade analysis here.
Bringing it all together, GOOG vol is pricing a one day move off of earnings less than the eight quarter average (and median). Now the question... Do you expect GOOG to move more, less or about equal to it’s recent average? Perhaps a bit more holistic, is the current macro environment more or less “risky” than the past? Question number 2 is not trivial... for that matter, neither is number 1.

This is trade analysis, not a recommendation.

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RENN is trading $6.06, up 4.7% with IV30™ down 5.4%. The LIVEVOL® Pro Summary is below.



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Renren Inc. (Renren), formerly Oak Pacific Interative, incorporated in February 2006, is a social networking Internet platform in China. Renren generates revenues from online advertising and Internet value-added services (IVAS).



I found RENN on a real-time custom scan. This one hunts for calendar spreads between the second and third months. Add an earnings date in the back month and Facebook's IPO, and we have an interesting vol story.

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

The 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 third months that are cheaper than the second month by at least 7 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Let's look to the Skew Tab.



We can see how May lies above Jul (in terms of vol). Both expiries show a similar shape -- sort of flattish through the middle. May does have some kinks to the OTM call side. RENN doesn't have a huge trading history, but the last four earnings cycles have been: 6-20-2011, 8-11-2011, 11-11-2011 and 3-8-2012. Basically, a reasonable guess could be that the next earnings cycle is outside of May and certainly within the Jul expiry. That means the elevated front is potentially ex-earnings while the back has the vol event. Tricky... But there's more...

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).



The stock price has been rather volatile. I've highlighted the move between 1-26-2012 and 1-30-2012, when the stock moved from $4.16 to $6.31, or 51.7% in two trading days. The news from that time is included below:

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Social media company Renren Inc (RENN). led a surge in Chinese Internet companies after a report that Facebook Inc. may file for an initial public offering next week.

Renren jumped 26 percent to $5.25 at the close in New York after the Wall Street Journal report, the most in more than eight months. Sina Corp (SINA)., which operates a service similar to Twitter, rose 12 percent to $69.96.

Source: Bloomberg via Yahoo! Finance -- Chinese Internet Companies Jump on WSJ Report of Facebook Initial Offering, written by Zachary Tracer - Jan 27, 2012 2:06 PM PT.
---

Perceived investor demand for this type of company (new social media) sort of spread across the industry off of Facebook's pricing, and since RENN and Facebook are pretty much equals, the move makes sense...

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



Look at the top of the tab -- May is priced to 102.61% while Jul is priced to 93.82%. The FB IPO is another potential vol event for RENN.  As of right now, FB hasn't decided between May 17th or May 24th for it's IPO. May expiry is Saturday May 19th. Right in the middle... how about that...

This is trade analysis, not a recommendation.

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TZOO is trading $27.05, up 28.4% with IV30™ up 4.9% as of ~10:10am EST. The Livevol® Pro Summary is included below.



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Travelzoo Inc. (Travelzoo) is a global Internet media company. The Company informs approximately 24 million subscribers in North America, Europe and Asia Pacific, as well as millions of Website users, about the travel, entertainment and local deals available from thousands of companies.

The stock is up on news that it’s putting itself up for sale, which tends to push stocks higher for what reason I have no idea… Here’s the news:

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Struggling online travel company Travelzoo(TZOO_) is reportedly considering an outright sale, as weakness in its core travel-related advertising revenue led to an over 70% stock drop in the last 12 months.

Travelzoo is in the process of hiring a financial adviser, as the company looks for an acquirer of its Web and newsletter businesses that link vacationers with flight, hotel and resort deals, according to a Reuters report, citing three unnamed sources. Private equity firms, including Permira, and online travel company ODIGEO, have already shown takeover interest in Travelzoo, the report said.

Source: TheStreet via Yahoo! Finance -- Travelzoo Shares Surge on Sale Report, by Antoine Gara.
---

Just to be clear, the stock is down 70% on core business weakness and now that the company is up for sale the valuation is up 30%. OK…

Let’s turn to 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).



The stock chart over the last six months doesn’t really show a lot of movement as the stock has been relatively range bound. The real stock drop is relative to a one year window where the 52 wk range is [$20.68, $103.80]. The stock closed at $21.06 yesterday, so very close to its annual low. Then today happened…

On the vol side, we can see how the implied has been nearly 140% over the lat six months, but now is in the low 60’s. We can see how the implied does tend to trade above the short-term historical realized vol (HV20™). Having said that, the longer term HV180™ is 72.43%, and that does not include the move today. The 52 wk range in IV30™ is [50.04%, 160.01%], putting the current level in the 10th percentile.

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



We can see a monotonic vol increase from the back to the front across the front three expiries. There’s an upside bend to the OTM calls in the Apr and Jun cycles, oddly not in May, though. The next earnings release for TZOO is ambiguous. It could be either at the end of the Apr cycle, or at the start of May… tricky… For the last two years the earnings date in calendar Q2 has been 4-26-2010 and 4-21-2011. For the record, Apr expo is Saturday 4-21-2012. It’s difficult to back out the earnings date from the vols as the news today sort of supersedes the vol in the earnings event.

Let’s check out the Options Tab for completeness.



I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. The vols by expiry are 70.67% and 61.88% for Apr and May. You can see there’s a projection of earnings in Apr, but that’s pretty iffy, so in a sense, I’d pretend that’s not even there.

Ultimately the idea of a firm going up for sale is not good news IMHO – management wants out, how is that good? Take TZOO in particular, with what appear to be substantial struggles in the core business (or at least core advertising), and at the very least vol in the 10th percentile (annual) feels... weird... I do note that the firm has positive earnings and a fair amount of cash on hand, so it doesn’t appear to be at risk as a going concern.

This is trade analysis, not a recommendation.

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SPY is trading $136.04, down 1.6% with IV30™ up 12.9%. The LIVEVOL® Pro Summary is below.



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SPDR S&P 500 ETF Trust (the Trust) is an exchange traded fund. The Trust corresponds to the price and yield performance of the S&P 500 Index. The S&P 500 Index is composed of 500 selected stocks and spans over 24 separate industry groups.

This is a vol note on the overall market -- specifically a phenomenon that has developed in the front two months. 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).



We can see that over the last six months the market has risen quite substantially, but in the last few trading days, has seen a fall off from the recent highs. On the vol side, we can see how the implied has risen with the drop. You can think of the IV30™ as a slightly adjusted (perhaps more meaningful) version of the VIX. But the vol rise isn't the oddity that I found.

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



I have taken a snippet of the skew -- specifically, only +/- 10% from ATM, and only options that are $0.25 bid (or more). What we can see is that the front expiry (yellow) lies on top of the back (green) for OTM puts, but below for OTM calls. Looking directly at the ATM options, we can see an 18% vs 18.36% Apr vs May, or in English, essentially identical vols. Let's now keep in mind that earnings season is right around the corner. In fact, AA kicks it off today AMC. Just like individual stocks, an index will show elevated vol in the front month as earnings approach. Let's turn to the Skew Tab on 1-11-2012 -- one quarter ago (AA earnings were 1-9-2012).



Last quarter, we can see that the second month (green) lied clearly above the front month (yellow) for all strikes. In a sense, that spread represents the risk premium the overall market placed on earnings season. Keep in mind that the SPY (SPX) is simply a reflection of the aggregate -- it's a basket of 500 companies and that goes for price and volatility.

As I see it, for the current quarter, the market has a lower risk premium on earnings than last. Is this data fitting? I dunno. But big names like GOOG, AAPL, IBM, XOM and MSFT have earnings in the same month as they did last quarter (GOOG, IBM and MSFT in the front (Jan and Apr), AAPL and XOM in the back (Feb and May)). Note that I'm referring to option cycles, not calendar months.

I guess the question is, does a lower risk premium relative to earnings make sense comparing this April to this Jan?

I've included the Options Tab, for completeness.



This is trade analysis, not a recommendation.

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ILMN is trading $52.33, down 0.6% with IV30™ up 5.1% as of ~10:20am EST. The LIVEVOL® Pro Summary is below.



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Illumina, Inc. (Illumina) is a developer and manufacturer of life science tools and integrated systems for the analysis of genetic variation and function. The Company provides a line of genetic analysis solutions, with products and services that serve a range of interconnected markets, including sequencing, genotyping, gene expression, and molecular diagnostics.

This is one of the most interesting vol stories out there right now, IMHO. The story starts with a hostile takeover bid… Then a re-upped bid… then a stand by the Board of Directors spurning even the second bid. 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). Then we’ll go to the news.



On 1-25-2012, ILMN stock popped from $37.69 to $55.15 or 46.3% in a day. Here’s that news:

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Roche Holdings Ltd. (Other OTC:RHHBY.PK - News) recently announced that it has placed a bid to acquire all the outstanding shares of Illumina Inc. Roche’s offer of $44.50 per share (aggregate value $5.7 billion) in cash represents a 64% premium over Illumina’s stock price on December 21, 2011.

On December 22, 2011, rumors in the market about a potential transaction between Roche and Illumina had pushed up Illumina’s stock price significantly.

We note that Roche had made multiple efforts in the past to strike a deal with Illumina, but the latter was unwilling to participate in substantive discussions. This led Roche to commence a tender offer to purchase Illumina’s outstanding shares.
Source: ZACKS via Yahoo! Finance -- Roche Aims for Illumina
---

Then on 1-26-2012:
---
U.S. gene sequencing company Illumina (ILMN.O) on Thursday unveiled a "poison pill" defense strategy against a hostile bid from Swiss drugmaker Roche (ROG.VX), saying it would trigger a rights agreement if any party bought 15 percent of its stock.

Basel-based Roche is offering $5.7 billion in cash for Illumina but the Californian group is resisting the unsolicited approach.
Source: Reuters via Yahoo! Finance -- Illumina unveils poison pill to stave off Roche
---

Then some board nominations by Roche… And four different letters sent directly to ILMN shareholders highlighting the growth prospects for the combined firm.

Not enough? Try these awesome headlines all within the last three weeks:

3-22-2012: Roche seen extending its Illumina offer once again Reuters

3-26-2012: Roche Extends Illumina Bid Again Zacks

3-29-2012: Roche Raises Illumina Bid to $51, Seeking Faster Deal at Bloomberg

3-29-2012: Roche may raise bid again if Illumina engaged: source at Reuters

3-29-2012: Analysts expect higher Roche bid for Illumina at MarketWatch

3-30-2012: For Illumina, Roche's Third Offer Not So Charming at Seeking Alpha

4-1-2012: Roche May Drop Its Offer for Illumina, Sonntags Zeitung Reports at Bloomberg

4-2-2012: Illumnia Rejects Roche’s Revised Offer of $51 a Share at Bloomberg

4-3-2012: Illumina to Shareholders: We Are Like Apple, Would You Sell Apple? at The Wall Street Journal

Then over the last two days:

4-9-2012: Illumina sends letter that recommends stockholders reject Roche's (RHHBY) offer and vote white proxy card. Provided by Briefing.com (www.briefing.com).

4-10-2012: Illumina: Proxy advisory firm Glass Lewis recommends stockholders vote for the election of all illumina nominees using management’s white proxy card. Provided by Briefing.com (www.briefing.com)

So, there you go – a wild ride. For more fun, ILMN has an earnings release due out either right near Apr expo, or early in May expo. Yeah, either one – unknown.

Let’s look more carefully at the IV30™ -- to highlight another trend. This chart is the same time horizon as the one above, but it looks only at the implied:



I’ve highlighted the recent move in IV30™, namely, up. Yeah, risk is rising. Note that the implied may well be on a path back to the original value before the takeover bid… and maybe even higher.

Let’s turn to the Skew Tab.



Most notably, we can see the front month is elevated to the back, and quite substantially at some points. The last two earnings releases in calendar Q2 for ILMN have been 4-28-2010 and 4-26-2011. It’s a reasonable bet that the next earnings release will in fact be inside May expiry and outside Apr. And now we have an even more compelling term structure comp between Apr and May.

News is coming – one way or the other on this bid / spurn dance. The question, is it coming out before Apr expo, or is there a larger announcement due out in the earnings release. Will the company (ILMN) disclose some extraordinarily rosy “stuff” in the next earnings release intended not so much for outsiders, but for current shareholders? -- You know, a compelling argument for a higher valuation – well above the bid(s)…

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



I wrote about this one for TheStreet.com (OptionProfits), so no specific trade analysis here. Across the top we can see that Apr is priced to 58.20%, while May is priced to 50.32%, even though earnings are likely in the Mat expiry (but not in Apr). Just to throw another possibility out there, what if another company bids for ILMN – or even more interesting, if ILMN approaches another company and therefore solicits a bid?

Also, ILMN may be dangerously close to breaching its fiduciary responsibility by refusing to meet with Roche. Couldn’t a shareholder complain that at least a meeting is in place? How about two, or three, or four?.. Careful, that makes a “class,” as in “class-action” lawsuit.

The equity market has ILMN priced over the second bid ($51), but what is fair value if the bid disappears? Or if a class of shareholders demand meetings? Or.. if earnings are bad? All in all, this is incredibly interesting, but in the same vein, incredibly risky.

This is trade analysis, not a recommendation.

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MCP is trading $33.98, up 1.1% with IV30™ down 7.5%. The LIVEVOL® Pro Summary is below.



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Molycorp, Inc. (Molycorp) is a rare earth oxide (REO) producer in the Western hemisphere. The Company owns developed rare earth projects outside of China. The Company also owns rare earth oxide and rare metal producer in Europe.

I found MCP using a real-time custom scan. This one hunts for low vols.

Custom Scan Details
Stock Price GTE $7
IV30™ - HV20™ LTE -8 GTE -40
HV180™ - IV30™ GTE 7
Average Option Volume GTE 1,200
Industry != Bio-tech
Days After Earnings GTE 32

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 short-term implied vol (IV30™) that is depressed 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 purchasing depressed IV30™ relative to HV20 simply because of a large earnings move.

The MCP 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).



The stock has seen a low of $23.46 and a high of $42.29 in six months, so, a rather large(ish) range. But, as the custom would indicate, this is a vol story. Several things I note:

1. The implied is well below the short-term (HV20™) and the long-term (HV180™) historical realized vols. Specifically:

IV30™: 53.25%
HV20™: 83.07%
HV180™: 82.36%

So, IV30™ is depressed relative to the short-term and long-term realized movement of the stock. I do note that the HV20™ appears to be a bit "artificially" elevated due to the large move on 3-8-2012.  The stock went from $25.98 to $30.89, or up nearly 19%.

2. The IV30™ is also depressed relative to its own annual history. The 52 wk range in IV30™ is [45.86%, 116.18%], putting the current level in the 10th percentile.

3. There's a pretty noticeable trend in IV30™, namely, down. I've included a larger image focusing on just the IV30™, but for the same horizon as above (six months).



I added that ever so helpful yellow arrow pointing out the down trend. Note how the last two earnings cycles  ("E" icon) have hit lower peaks.

Let's turn to the Skew Tab.



There's a noteworthy parabolic skew to MCP across all of those three expiries pictured. I checked he historical skew and there was a similar parabolic skew that emerged in MCP off and on, though the vols in the tails weren't quite as high (relative to ATM). Even with the depressed implied, the option market does reflect that the likelihood of both upside and downside moves is about equal (unlike "normal" skew).

One last note is that the next earnings date for MCP is likely in the May expiry (just a projection on my part), and that event risk is embedded in the May options -- and thus the higher ATM vol relative to the other two expiries pictured.

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



We can see May is priced to 56.68% vs Apr (monthly) priced to 51.56% vol. Again, that's probably earnings related. That 56% number would still be in the 14th percentile for IV30™ (annual).

This is trade analysis, not a recommendation.

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