optionvol-NBC-Bay-Area

This is a follow up to the article I posted in Dec 2011:
Why China Will Collapse By This Summer (click the title to read the article).

While that article posed arguments for a collapse, the primary source was an expert, but an expert with a known bearish point of view towards China. I made some arguments, for the sake of two-sided discussion, against the collapse, but ultimately really never took a side.

I'm going to reprise some of the arguments made in Dec with facts as of July (and with charts). You tell me what you think, now...

Let's start with premise in Dec and some snippets and bullet points to make it flow quickly. The source for this information comes from an interview with Gordan Chang on Yahoo!. You can listen to that interview here:
The Wheels Are Coming Off China’s Economy: Gordon Chang

Dec 20, 2011
---
Gordon Chang, author of "The Coming Collapse of China" and a columnist at Forbes.com, has been sounding the alarm bells about China for years and backs up his prognosis with recent government data:

-electricity consumption is flat
-car sales - a bellwether for consumption - are flat
-property prices are collapsing - even in cities like Shanghai and Beijing
-industrial orders are down - especially those relating to the domestic economy"


Point #1: It's not inflation to fear, but deflation
The Chinese government (and the world at large) has been vigilant if not obsessive about China’s rate of inflation. Most of the focus has been on keeping it from going too high as elevated inflation would prevent them from continually flooding the economy with money. But, the numbers reported by the Chinese government state that inflation fell from 5.5% in October down to 4.2% in November. Good right? Not quite. Chang claims that inflation dropping is a problem if it’s too fast – and he’s right. If those numbers are accurate – 1.3% in a month is almost preposterous. If repeated, that’s not a slowdown – that really is a collapse.

Point #2: Property values are plummeting
What does Mr. Chang mean by collapsing property values? According to him, property values fell by 30% in Shanghai and Beijing in the month of October, alone.

Point #3: Chinese provinces are in trouble -- pumping money in won't work
China’s fix (actually the entire world’s fix) for a potentially fledgling economy has been to pump money into the economy (see the US and Eurozone). But, there’s a problem with that now.

Gordon says China cannot pump more money into the system to stimulate growth because of "questionable bank loans" and the high number of local Chinese provinces in debt.

Point #4: They’ve already built their ghost cities
Chang drops a bomb with a statistic on Chinese M2. He claims that China’s M2 at the end of Nov was 34% larger than the United States’ even though the US economy is more than twice the size of China’s. In other words, there is money and liquidity – some could say, a glut of liquidity. In English, the liquidity that’s present isn’t getting used so adding more money won’t do anything. As Chang puts it, "They’ve already built their ghost cities."

There are several factors contributing to China's slowdown, and Europe certainly plays a big factor. Europe is China's largest trading partner and Chinese export orders in November dropped sharply from October, rising 13.8% last month from 15.9% in October. As reported by The Wall Street Journal, China's labor costs are no longer considered "cheap" as fewer migrant workers choose factory jobs, thus "pushing up labor costs."

"We'll see more obvious signs of deterioration in the Chinese economy over the next six months," says Chang.
---

Let's fast forward to the present. The two sources I make most use of are:
1. The last thing the world needs now is a deflationary shock from China. Source: The Telegraph, written by Ambrose Evans-Pritchard

2. China’s ‘5 apocalypses’ signal global recession. Source: Marketwatch, written by Paul B. Farrell

I'll source these throughout the article by referring to the source number (i.e. #1 or #2).

Here are the arguments that the stern warning in December was right:

Remember point #1 from Chang: It's not inflation to fear, but deflation
---
Source: #1
China is on the cusp of a deflationary vortex.

This was signalled late last year by the sharpest contraction in the (real) M1 money supply since modern records began. The hard data is now confirming the warnings.

(I've included a 5 year chart of Chinese M1; Source: Bloomberg (http://www.bloomberg.com/quote/CNMS1YOY:IND/chart))

China Monthly Money Supply ( 5years)


Consumer prices have been falling for the last three months, producer prices have been falling for four months. This is not a food cost story. It is systemic.

"While an economy-wide generalized deflation is yet to be seen, the deflationary spiral looks to have started in some industrial sectors, attesting to considerable stress with the economy. Persistent deflation can be poisonous," said Xianfang Ren from IHS Global Insight in Beijing.

China CPI (Jan 2011 - present)
Source: Trading Economics (http://www.tradingeconomics.com/china/inflation-cpi)


Indeed it can be poisonous, and China already has the twin-afflictions of the deflation malaise: a fast aging nation, and a surfeit of factories and industrial plant.

Source: #2
Five months ago, we quoted World Bank President Robert Zoellick’s warning of “a spreading crisis” in China that could consume the $75 trillion global economy. Back then we bluntly asked: “China? Or America? Who will crash the global economy first?” Think: China.

China’s economy of 1.3 billion people continues slowing, according to the latest GDP-forecast downgrade from Premier Wen Jiabao, reported Keith Bradsher of the New York Times.

“China might already be in recession,” warns Trefor Moss in his brilliant “5 Signs of the Chinese Economic Apocalypse” in the journal Foreign Policy. Actually, five huge apocalypses. “The numbers show that the country’s storied growth engine has slipped out of gear. Businesses are taking fewer loans. Manufacturing output has tanked. Interest rates have unexpectedly been cut. Imports are flat. GDP growth projections are down.” Wen Jiabao’s 2012 growth target at 7.5%, if it happens, “would be China’s lowest annual growth rate since 1990.”

[...]

Export growth is also slowing — to Europe and the U.S., as well as Brazil. In fact, “exporters are going bust, and some factories that remain open have switched from three shifts to just one.” Meanwhile, migrant workers are creating “mass incidents” that could explode into an inland version of Tiananmen Square as China, as a developed nation, finds its growth rate gradually slowing. Think: Arab Spring, Occupy Wall Street, Greek riots.

Obviously the Chinese are having real problems blending central planning with free-market capitalism in a global marketplace with everybody competing for the same scarce resources. China’s learning these lessons the hard way. The price of coal has dropped 10% in the past year. “This drop could further dent the global economy,” cooling demand for exports.
---

Remember Point #2: Property values are plummeting
---
Source: #2
China’s central government decided to cool the overheated real-estate market. Property sales and revenue then dropped, creating a shortage of cash and confidence among potential buyers. Sounds familiar? Like here in America, where government revenues declined with taxpayers’ and investors’ income and spending? Yes, China’s economy is slowing. China, in fact, is most likely in a recession. And exporting it to America.

Source: #1
The problem was the explosive growth of credit in the preceding years. China was no slouch in this area. The IMF’s Zhu Min says loans doubled to almost 200pc of GDP between 2006 and 2011, including off-books lending.

This is roughly twice the intensity of credit growth – around 50 percentage points of GDP – before the US and Japanese blow-offs.

There seems to a near universal assumption that China can pull the levers of the state banking system and set off a fresh credit boom whenever it wants.

Well, perhaps, but loan demand has withered. The big four banks lent just 190bn yuan in June, down from 253bn in May.

"Large banks are all offering money, but no one is taking it," said a Shanghai dealer quoted by Reuters. This is more or less what happened in Japan in the 1990s, what is happening in Europe now. It is what happened to half the world in the 1930s.
---

Remember Point #3: Chinese provinces are in trouble -- pumping money in won't work
---
Source: #2
Warning: China’s local governments drowning in debt
Remember the hundreds of billions of dollars that went to U.S. banks? Well, the China central government gave a $586 billion stimulus package to local governments.

Back in the boom days, many of China’s local governments went wild, like pension funds in America, and bought fleets of “flashy cars.” But now, for example, “the city of Wenzhou is planning to auction off 80% of its vehicles this year,” reports Moss. “That’s 1,300 cars, with similar fire sales occurring nationwide.”

Remember Point #4: They’ve already built their ghost cities
---
Source: #1
Macao’s casino revenue – that closely watched proxy for the Chinese economy – dropped 11pc in June. Commodity stockpiles are grinding ever higher, with coal depots bursting at Tianjin and other key ports.

Steelhome China Thermal Coal Inventory Tianjin Port (YTD)
Source: Bloomberg (http://www.bloomberg.com/quote/SCVCTIAN:IND/chart)


Steelhome China Thermal Coal Inventory Tianjin Port (5 Years)
Source: Bloomberg (http://www.bloomberg.com/quote/SCVCTIAN:IND/chart)


[A]t the end of the day, the country is bursting with industrial over-capacity. As Caixin reported recently, eight of the ten largest shipyards did not receive any new orders in the first five months of the year.

Source: #2
[...] China started importing to satisfy increasing energy demands. But now “China’s ports are piled high with coal that should be roaring in the country’s power plants.” Why? “Lower manufacturing output,” answers Moss. Last year planners were stockpiling emergency coal. Now demand is dropping as “hard-pressed citizens, businesses, and factories cut their electricity consumption in order to reduce their bills.”
---

More disturbing trends
---
Source: #2

Chinese billionaires don’t trust their government, so they’re “looking overseas to invest in high-end property,” creating a wave of wealthy Chinese seeking foreign residences. Why? Great deals. Versus too many local restrictions. And, notes Moss, as “a hedge against political and economic uncertainty at home.”

Moss reports that Chinese prosecutors have gone after 19,000 dirty officials since 2000: “China’s wealthy and politically powerful are often members of the same family, and if China really does go into recession, a lot of rich people may decide to cut and run.”
---

Earlier this week, MarketWatch’s Carla Mozee reported that China’s slowdown is already impacting stocks in Brazil, one of China’s leading trading partners. (Source: #2).

Albert Edwards from Societe Generale said the danger now is that China suddenly lurches into a deeper downturn, unleashing a flood of excess goods onto global markets and sending a powerful deflationary impulse across the world (Source: #1).


Conclusion
The bell ringing and hand waving in December about this Summer ultimately seems to be, at least in part, correct. There's no getting around it, China has new found problems and as the second largest economy in the world (and the fastest growing of the big boys), the balance of the global economic system may be in the balance. After all, who's going to come to the rescue? The EuroZone? Will that term even exist in five years? The United States? Really?...

This is scary stuff but there has been scary stuff written about China before... for a long time. Ultimately, I don't think anyone knows, and whoever ends up being right (between those that see this as a cataclysm and those that don't), in many ways, they may be right out of coincidence.

I will leave you with the final words from the article in Source #1:

"Woe betide the world if China does indeed land with a thud. We will then have a synchronised planetary slump for the first time since you know when."




This is trade analysis, not a recommendation.

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SVU is trading $2.99, down 43.5% with IV30™ up 59.7%. The LIVEVOL® Pro Summary is below.



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SUPERVALU INC. (SUPERVALU) is a United States grocery channel. It operates in two segments: Retail food and Independent business. The Company leverages its distribution operations by providing wholesale distribution and logistics and service solutions to its independent retail customers through its Independent business segment.

This is a vol and stock note in a company that has just hit 30 year lows (at least) and is at at least a 2-year high in implied vol after reporting earnings AMC yesterday.  When something like this happens, we can actually back out the odds of bankruptcy with some simple math from the option markets.  But, that probability is oddly low... for now. Let's start with the news, then look to the analysis.

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Supermarket chain Supervalu (SVU) posted miserable first quarter results late on Wednesday and announced it will suspend its dividend. Shares fell 37% in pre-market trading.

Source: Barron's via Yahoo! Finance; Futures Keep Slumping; Supervalu, Merck, Chevron in Focus, written by Avi Salzman.
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And...

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Supervalu Inc. one of the nation's largest grocers, said Wednesday it is considering selling all or part of the company.

As the Minneapolis / St. Paul Business Journal reports, Supervalu (NYSE: SVU) said in a news release that it has hired Goldman Sachs and Greenhill & Co. to help it "review strategic alternatives to create value for the company's shareholders."

Source: The Business Portland Journal via Yahoo! Finance' Supervalu, owner of Albertsons, shops itself around .
---

Let's turn to some Charts to assess the real damage. We can 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).



It's pretty simple, really. On the stock side, we can see the collapse today. A more holistic view demonstrates the stock decline from ~$7.50 just six months ago. But, it's actually much worse. I've included the Yahoo! Finance "Max" chart for SVU, below.



We can see the current stock price is lower than any back through 1985. I've read on Twitter that the price is actually a low since at least 1980, or 32 years.

On the vol side, we can see the spike today is well into a six month high, but that too is too limited a view. I've included the 2-year vol chart (IV30™ only), below.



We can see the current level is well above any vol level over the last two years, and I suspect of all-time.

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



We can see a monotonic increase in vol from the back to the front. I do note the skew shape in Aug and Oct does show the OTM calls at higher vol than the ATM vol, which is not really "normal" skew. The Options Market does reflect some upside risk (potential),perhaps due to the news that SVU is looking to be bought. To read more about skew, check this post out:
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 131.08%, 124.16% and 91.39%, respectively for Jul, Aug and Oct. I do note a crucial point here -- the Jul and Aug "bankruptcy" puts are no bid. In English, the lowest strike puts are no bid which in a very back of the envelope way reflects the lack of risk of a bankruptcy through Aug. Although the Oct 1 puts are bid, the Jan'13 puts aren't, so that's sort of an anomaly, and in fact as I'm writing this, that bid has disappeared.

Normally we would calculate the risk of bankruptcy by using the lowest strike and take the mid-market value to compute a probability of bankruptcy like this:

Probability of Bankruptcy = (Put Value)/Strike

So for example, if the Oct 1 puts were $0.05 x $0.10 and we gave that a fair value of $0.075, the probability of bankruptcy by Oct expiry as reflected by the options market would be 7.5%. I re-iterate that this is not the case here. While the news is devastating to stock holders (and stakeholders of all sorts), as of yet, the option market does not reflect a tangible probability of bankruptcy... For now.

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PCS is trading $6.57, up 1.4% with IV30™ down 2.6%. The LIVEVOL® Pro Summary is below.



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MetroPCS Communications, Inc. (MetroPCS Communications) is a facilities-based wireless broadband mobile communications provider in the United States, including the Atlanta, Boston, Dallas/Fort Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco, and Tampa/Sarasota metropolitan areas.

This is a vol and stock note with earnings approaching. 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).



There's a lot going on with the stock, and I've highlighted three areas over the last six months.

1. On 2-23-2012 the stock popped off of an earnings report (BMO). But, the few days following the news, the stock came back down to the original price and then below the pre-earnings price. Here are some news snippets that shed light on the rise and fall in that few day period.

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2-23-2012
MetroPCS fourth-quarter profit jumps, beats expectations; stock at highest level since August

Source: AP via Yahoo! Finance; MetroPCS 4th-quarter profit jumps, shares respond
---

---
2-25-2012
Sprint's board of directors, after months of work on a deal to acquire pre-paid wireless company MetroPCS, has decided to walk away from the deal, according to CNBC sources.

The two companies were just hours away from announcing an acquisition of MetroPCS by Sprint in a deal that would have given MetroPCS shareholders Sprint shares as well as a small amount of cash.

According to David Faber, who broke the news, the deal would have valued MetroPCS at a roughly 30 percent premium to its stock price, before Thursday's big move up on better than expected earnings.

Source: CNBC via Yahoo! Finance; Sprint Board Rejects MetroPCS Deal at Last Minute

---

---
2-29-2012
NEW YORK (AP) -- Shares of MetroPCS Communications Inc., the country's fifth-largest cellphone company, fell Wednesday after it said it would introduce a $30 mail-in rebate for new phones.

[...]

THE ANALYSIS: UBS analyst John Hodulik downgraded MetroPCS share to "Neutral" on Wednesday, saying he expects higher costs to acquire subscribers to persist through the year. Increasing competition and higher gas prices, which weigh heavily on low-income households, also darken the outlook, he said.

He cut his price target on the shares to $11 from $15.

SHARE ACTION: The shares fell 72 cents, or 6.5 percent, to $10.30 in afternoon trading. The stock gave back nearly all of the boost it got after MetroPCS released fourth-quarter results on Thursday. That report had indicated the company was keeping tight lid on marketing expenses.

Source: AP via Yahoo! Finance; MetroPCS shares down on new phone discount
---

So a lot going on in a short-period of time, but ultimately the stock sort of stayed where it was before the news ever came out.

2. On 5-9-2012 the stock rose from $6.56 to $7.50 (14%). Here's that news snippet:

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MetroPCS climbs on reports company is in talks with Deutsche Telekom about sale

NEW YORK (AP) -- Shares of MetroPCS Communications Inc. jumped Wednesday on a report the company is in talks to sell itself to Deutsche Telekom AG.

Bloomberg News reported Wednesday that Deutsche Telekom may acquire MetroPCS in an all-stock transaction, and combine MetroPCS with its T-Mobile USA division. It said Deutsche Telekom could pursue other companies or sell T-Mobile USA. Earlier this year Sprint Nextel Corp. reportedly considered buying T-Mobile.

Source: AP via yahoo! Finance; MetroPCS jumps on reports of possible sale talks
---

That pop proved to be short lived as by 5-15-2012 (six calendar days later), the stock was trading below the $6.56 level.

3. Finally, I've highlighted the recent price action where the stock has risen from $5.59 on 6-26-2012 to now $6.57, or 18% higher in just a few weeks.

On the vol side, we can see how the implied dipped in late Jun, but since then has been rising abruptly as the stock has also risen. On 6-22-2012, the IV30™ was 45.58% and is now at 83.05% or 82% higher. The implied is now trading well above both the short-term and long-term historical realized vols. The vol comps are:

IV30™: 83.05%
HV20™: 42.70%
HV180™: 55.77%

The 52 wk range in IV30™ is [38.985, 87.18%], putting the current level in the 91st percentile (annual). Earnings are due out (confirmed) on July 26th, which is in the Aug expiry cycle but outside of July.

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



There are two interesting phenomena here and one that's kinda obvious.

1. Aug vol is elevated to Nov -- that's simply a reflection of the risk inherent in the earnings announcement on July 26th.

2. Jul vol is actually elevated to Aug -- that's weird in that Jul doesn't have the earnings announcement and points to the reality that the option market reflects greater near-term risk (next week and a half) than it does out to Aug (with earnings). Just to be clear though, it does not mean that the risk reflected in Jul options is greater than the single day risk of the earnings announcement.

3. The most interesting phenomenon is the skew shape difference between Aug and Nov. Aug shows an upside skew -- the OTM calls are priced to higher vol then the OTM puts and the ATM options. In English, the option market reflects greater upside risk (potential) than downside risk in PCS for the Aug expiry cycle (with earnings). Tricky in that Nov shows a normal skew shape (the opposite). To read about 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 85.48%, 82.20% and 64.83%, respectively, for Jul, Aug and Nov. With the upside skew in Aug, it feels like the option market has priced in the potential for another takeover rumor/run or possibly an earnings report that pushes the stock up.  Ya know.. or not...

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QCOR is trading $48.17, down 16.4% with IV30™ up 55.2%. The LIVEVOL® Pro Summary is below.



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Questcor Pharmaceuticals, Inc. (Questcor) is a biopharmaceutical company. The Company’s primary product is H.P. Acthar Gel (repository corticotropin injection) (Acthar), an injectable drug that is approved by the United States Food and Drug Administration, for the treatment of 19 indications.

This is a stock and vol note in a bio-tech with news out yesterday that pushed the stock up abruptly that couldn't have been better... and then news today that has dropped the stock right back to where it started, on news that couldn't be worse.

Let's start with the Charts Tab (six months), below. Then we'll get right into the news, which to me, at least, is incredible. The top portion of the Charts Tab is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



First, there's the move from yesterday, along with the Livevol®' Pro summary from yesterday as well.

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7-9-2012


What: Shares of Questcor Pharmaceuticals (Nasdaq: QCOR) jumped as much as 17% today to fresh all-time highs after the company reported upbeat sales of its multiple sclerosis drug Acthar.

So what: The company shipped 1,800 vials of the drug in June, bringing its quarterly total to 4,710. That represents a 15% sequential increase relative to the first quarter. Paid subscriptions also rose to between 400 and 410, up from 339 in April and 365 in May.

Now what: Following up the optimistic figures, Jefferies is increasing its price target from $56 to $60, saying the 1,800 in shipments implies $111 million in sales, notably higher than the $103 million consensus that the market is looking for. The company has repurchased more than 3.7 million shares for $156 million during the quarter and still has about $114.7 million in cash and equivalents.

Source: The Motlly Fool via Yahoo! Finance; Why Questcor Pharmaceuticals Jumped, written by Evan Niu.
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OK, so sales figures better than expected and a stock re-purchase program all pushed the stock to an all-time high. This is a bio-tech whose primary product is FDA approved and is selling better than projected. What could go wrong?... Yeah...

Here's the news today, and you better believe it's vol worthy.

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7-10-2012
Questcor Pharma: Weakness being attributed to negative Citron Research report

Source: Provided by Briefing.com (www.briefing.com)
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And the Citron report... It's a doozy and I've included a bug chunk of it, but you're gonna wanna read this. I added the underlining, but the bold font is from the Citron report.

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A Citron Prescription for Truth on Questcor — with the Documents and Statistics the Company Doesn’t Want You To See!
Posted in Citron Reports by Stocklemon on the July 10th, 2012

Let's be clear: Citron is not claiming Questcor's sole drug HP Acthar Gel is "snake oil". It is a real drug with a bona fide FDA approval. [...] HP Acthar Gel is injectable corticotropin. It has one active ingredient: a well known, naturally occurring substance in humans called adrenocorticotropic hormone, or corticotropin, or ACTH for short.

The problem with Questcor as an investment thesis is that this same hormone ACTH has also been approved by the FDA as a generic drug numerous times in the last 60 years – by numerous manufacturers – with essentially the same label for the same conditions.<> Through the Freedom of Information Act, Citron has obtained the FDA's approval history on ACTH. If you are a Questcor investor, Citron recommends you read these file, which completely negate the "barrier to entry" claims of Questcor's CEO. Certainly the numerous analysts "covering" the company's stock with generous buy recommendations and lofty price targets have not done so – their projections wouldn't be so optimistic if they did their homework. On the other hand, it's nice to be ahead of the Street when you have the chance.

Then there's the biotech advisory newsletter BioPharmInsight, far from the company-laced propaganda on Wall Street, full of the most eye-popping quotes revealing the realities behind Questcor's claims about its sole drug Acthar … Citron guarantees Questcor Don Bailey does not want you to read this article — including his own quotes.

So why is Questcor's CEO saying these crazy things about Acthar? Because he needs to create the illusion of a barrier-to-entry to justify a purported "multi-billion dollar market opportunity" — when it simply doesn't exist.

If you are a Questcor investor, "Dr. Citron" prescribes a dose of truth about Questcor, easily digested from the attached .PDF file. Warning label: It's strong medicine. It includes:
• a complete workup on the competitive threats that can cause heart seizure for Questcor's earnings at any time
• a diagnosis of the insurance industry's tightening policies on the all-important reimbursement of Acthar Gel, without which Questcor gets no revenue.
• an "X-ray" of Questcor management's indisputable history of printing out and exercising options while the company buys back stock — which might make you want to yell "Clear!"

Source: Citron Research - A Citron Prescription for Truth on Questcor — with the Documents and Statistics the Company Doesn’t Want You To See!
---

So, just to re-iterate, this research claims that the very drug that QCOR is selling has no barriers to entry, has generics already on the market and could lose reimbursement status.  Further, the report accuses the CEO of lying (which is a crime for CEO's of public companies).  See... couldn't be worse...

I've included the vol chart for the same six month period, but with only the IV30™, below.



The yellow box highlights the vol drop from yesterday's move. When a firm delivers sales figures (good or bad news), there is less unknown information and vol "should" go down.

The blue box highlights the vol gain today of 55.2%. Certainly, the accusations and remarks from Citron increase risk if even a part of the investing public believes even a part of the research. The 52 wk range in IV30™ before today was [35.59%, 81.12%], so the current level is a new annual high. Given the nature of the Citron report, I'd say it's reasonable that the option market reflects more risk in QCOR now than it has since September of 2010.

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



Through all of this, the skew has actually maintained a nice (and "normal") shape. We can also see that the front month ATM vol is in-line with Aug ATM, but the OTM puts in the front are more expensive (in terms of vol) than Aug. Keep in mind that the next earnings release for QCOR is probably after Jul expo, but in the Aug cycle (perhaps in late July (the month, not the expiry)). All told, the skew has not shifted from what I can see.

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



Across the top we can see that Jul, Aug and Oct vols are priced to 84.51%, 83.92% and 68.99%, respectively. Noting that the annual high in IV30™ was ~81%, we can see that both Jul (without earnings) and Aug (with earnings) are now priced at what would be annual highs. For the record, before these two days of news, QCOR closed at $50.23. I also note that the Aug 30 puts are priced to ~$0.75 mid market (115% vol) and the Jul 35 puts are priced ~$0.35, or 127% vol.

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MAKO is trading $14.91, down 39.4% with IV30™ up 1.7%. The LIVEVOL® Pro Summary is below.



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MAKO Surgical Corp. (MAKO) is a medical device company that markets its robotic arm solution and orthopedic implants for orthopedic procedures called MAKOplasty. The Company offers MAKOplasty, a surgical solution that enables orthopedic surgeons to treat patient specific, osteoarthritic disease.

I wrote about MAKO five days ago, when it triggered a vol custom scan. You can read that post here:
MAKO Surgical (MAKO) - Vol Rising, But Why?...

As a reminder of where this stock was just a few days ago, I've included the Livevol® Pro Summary from the prior post below, as well as the quick summary from the end of the last blog. The news (and move) today is a disturbing repeat of the 37% drop this stock saw less than two months ago.

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7-5-2012


"Ultimately, there's a lot of speculation with this stock -- it's small and sales are small but it is seen by some as a revolutionary firm. High vol makes sense, but I'm not sure what has caused the vol to rise so abruptly of late other than a class action lawsuit deadline. The class action surrounds the stock drop and purported misrepresentations or failures to disclose information... But I don't think that's really affecting the vol..."
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Well, apparently there was a sales update due out and the vol was elevated for good reason. As I stated in the prior note, something was afoot and it wasn't a class action lawsuit. On a side note, we can likely expect further class action lawsuits from shareholders after this drop -- kinda comes with the territory.

Let's look to the Charts Tab (six months), below, and continue the analysis from five days ago. 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 two abrupt stock drops. The first was on 5-8-2012. Here's that news snippet:

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What: Shares of medical device company MAKO Surgical (Nasdaq: MAKO ) sank a staggering 35% on Tuesday after its quarterly results and outlook disappointed Wall Street.

So what: MAKO's stock has risen nicely in 2012, but lower-than-expected first-quarter sales -- $19.6 million versus the consensus of $23.7 million -- coupled with a full-year guidance cut is forcing Mr. Market to sober up quickly. While management's outlook isn't drastically lower, investors are nervous that slowing hip utilization trends set the company up for even more misses down the road.

Source: The Motley Fool via Yahoo! Finance; Why MAKO Surgical Shares Got Whacked, written by Brian D. Pacampara.
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So sales estimate was missed. Then, the news today:

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Mako Surgical Corp. (MAKO) fell 40 percent in New York trading after saying it expects to sell fewer RIO robotic arm orthopedic systems this year, less than forecast.

[...]

Based on results from the first six months, 42 to 48 of the systems may be sold this year, the Fort Lauderdale, Florida- based company said in a statement yesterday. The prior outlook called for sales of 52 to 58 systems, Mako said.

“I think it’s an issue of management credibility and of growth,” said Michael Matson, a New York-based analyst with Mizuho Securities USA, in a telephone interview.

Source: Bloomberg via Yahoo! Finance; Mako Surgical Plunges After Cutting Rio System Sales Forecast, written by Jeanna Smialek.
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Management's credibility is certainly in question -- I agree with the quote. This was a $41 stock in mid-May and the only two news stories that drove the stock down were missed sales estimates -- one on a quarterly earnings report and the other in a sort of "half-time" update.

On the vol side we can see how the implied has been rising. I've included a vol chart with just the IV30™, to make the vol move a bit clearer.



Since mid-June, the vol is up 50%. I do note that as I'm writing this blog, the implied has actually turned negative on the day, so while the vol spiked in early morning trading (which I was going to note as odd), it has finally come in a bit. Having said that, the vol is still substantially elevated to its recent past, at just about a six month high. The option market reflects elevated risk, even as news comes out.

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



The next earnings release is due out in early Aug, and we can see that even after the news has been released, the front month is still at the level of the second month. The option market reflects as much risk in the near-term as it does for the upcoming earnings release. In contrast, the Nov expiry shows much lower vol.

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



Across the top we can see the monthly vols are priced to 89.36%, 91.61% and 82.05%, respectively for Jul, Aug and Nov. Over 30,000 option contracts have already traded on total daily average volume of ~5,000, with puts trading on a ~1.7:1 ratio to calls. Ultimately, there's still elevated vol in this name, even outside of the earnings release (in Aug). The news isn't settled and neither is the vol.

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AMRN is trading $15.23, up 0.7% with IV30™ up 6.8%. The LIVEVOL® Pro Summary is below.



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Amarin Corporation plc (Amarin) is a late-stage biopharmaceutical -company with expertise in lipid science focused on the treatment of cardiovascular disease. The Company’s product candidate is AMR101, an ultra-pure omega-3 fatty acid. It is developing AMR101 for the treatment of patients with high triglyceride levels, or hypertriglyceridemia.

This is a vol and stock note on a bio-tech with $0 in revenue but a $2 billion market cap. The stock has been and continues to be the subject of takeover rumors and a huge FDA approval meeting (PDUFA) is due out July 26th. The vol is at a 2-year high (at least).

I last wrote about AMRN on 4-25-2012 (so ~2.5 months ago). The stock was trading $10.05 and vol was spiking at 100.58%. The Livevol® Pro Summary from that date is included below.

4-25-2012


That blog post focused on the takeover rumors that were swirling and pushing vol up. Those rumors resurfaced on Friday and with the impending FDA decision, 100% vol and a $10 stock are no longer the story -- it's a $15 stock with 130% vol that we're lookin' at now. You can access the original post in April on AMRN here:
Amarin Corp (AMRN) - Bio-tech Rumors Break Vol; Short-term Risk / Long-term Risk Elevated -- Skew Diverges

Moving on to today's action, let's start with the news. First, the takeover spec, then the FDA ruling. Then we can look at how the vol reflects both of these phenomena in distinctly different ways. Very, very cool.

News
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7-5-2012
Rumor activity resumed today on a soft note.
• Chatter circulated that AstraZeneca (AZN) could be interested in Amarin (AMRN).

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)
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7-9-2012
Shares [of AMRN] have been trading between $5.99 and $15.60 during the past 52 weeks, and are poised to trade higher as the company draws closer to an FDA approval decision for its prescription fish-oil AMR101 on July 26th, 2012, which I believe the FDA will approve.

AMR101 is an investigational ultra-pure omega-3 fatty acid in a capsule, comprising not less than 96% icosapent ethyl (ethyl-EPA) in a capsule. Amarin is developing AMR101 for the potential treatment of patients with very high triglyceride levels and high triglyceride levels, or hypertriglyceridemia. Triglycerides are fats in the blood. Amarin's cardiovascular strategy leverages our extensive knowledge and experience in lipid science and the potential therapeutic benefits of polyunsaturated fatty acids in cardiovascular disease.

Source: Seeking Alpha via Yahoo! Finance; Bio-Pharma Movers For Monday, July 9 , written by Scott Matusow.
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So there you go... 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).



On the stock side, we can see how AMRN climbed abruptly in mid/late Mar on takeover spec. That's what the first blog post focused on. At its peak, the stock popped ~70% from that news (from ~$7 to ~$12). The stock came back down and settled at $10 (ish). However, starting in late May, the stock has found legs to the upside again and is now trading above $15.

On the vol side, we can see how the implied popped abruptly to triple digits in mid/late Mar (see first blog for details) off of the takeover rumors, but then settled to the mid 70's. But, since 6-20-2012, the IV30™ has steadily but substantially increased from 63.98% to now over 133%. That's a 108% rise in vol as the stock has risen 20% over the last three weeks. As I noted at the top of the article, the level of the implied now is well into new 2-year high territory (the prior high was 126% (ish)).

Let's turn to the Skew Tab and we'll be able to see both the impact of the takeover rumors and the PDUFA date / decision.



We can see that Aug vol is well elevated to Sep (on all strikes) and Jul (for the ATM). In fact, the ATM vol in Jul is the lowest of the front three expiries. This elevated vol in Aug is a reflection of the risk inherent in the FDA decision. That vol will rise as we get closer tot he PDUFA date as long as (1) no news is broken early and (2) the PDUFA date remains in the Aug cycle (no delays).

We can also see the incredible vol in the upside calls in Jul. In fact, the vol is at such a fevered pitch in the Jul OTM calls that they surpass the vol in Aug which has the PDUFA date. It's that reverse skew that reflects the risk of the takeover.

So, in English, what we see are two distinct vol phenomena -- the risk of the FDA decision and the risk (potential) of the takeover. It's fascinating to watch the takeover spec given the fact that this firm has $0 in revenue yet is worth $2 billion in market cap. One might say that the FDA decision is a "big" one for AMRN...

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



Across the top we can see the monthly vols are priced to 102.67%, 147.67% and 120.43% respectively for Jul, Aug and Sep. Keep in mind that Aug vol comprises of a month worth of days (or whatever). We're looking at a bunch of "normal" vol days, and one "huge" vol day (the PDUFA ruling). As we move through the "normal" days in Aug and approach the singular "huge" vol, the overall level of Aug vol will rise substantially. A very rough back of the envelope calculation shows me that the vol on the day of the FDA decision is priced at ~500% (that's assuming 100% vol is "normal"). That doesn't mean Aug vol goes to 500%! But you already knew that... right?...

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TTWO is trading $9.25, down 1.8% with IV30™ up 2.4%. The LIVEVOL® Pro Summary is below.



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This is a vol and skew shape note coupled with some bullish order flow over the last couple of days. Let's start with the order flow today, then Friday, and then finally look to the vol. Over 4,300 contracts have traded today in the first three hours on total daily average volume of just 2,438. 4,000 of those contracts were done as a Dec 8/11 risk reversal (selling puts to buy calls) for a $0.025 credit and from what I hear on the floor, there was no stock. The Stats Tab and Day's biggest trades are included below.





Even more interesting, in terms of bullish flow, was the action on Friday. It looks like there was naked OTM call buying in the Aug 10's ~5,300x. I've included the Options Tab from that day (on-close), below.



Tricky... Let's turn to the Chart 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 how far the underlying has dropped. The stock was trading above $16 in Feb and is now right on an annual low. The 52 wk range is [$9.13, $16.99], so as of this writing, TTWO stock is down ~45% from early Feb.

On the vol side, we can see how the implied has risen of late and diverged from the short-term historical realized vol. In English, as the stock has found a bit of a quiet period (with a downward tilt), the implied has been rising. As of now, the implied is trading well above both the short-term and long-term historical realized vols. Specifically:

IV30™: 46.40%
HV20™: 35.81%
HV180™: 32.35%

The 52 wk range in IV30™ is [23.71%, 79.60%], so the current level is still just in the 42nd percentile. In English, while the IV30™ has been rising of late (and is elevated to the realized vol), it's still "low" relative to its annual average. In any case, we see a dipping stock, rising vol and decidedly bullish order flow. I note that the next earnings release is due in early Aug.

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



We can see that Aug lies above the other front expiries (due to earnings). I do however also note that the upside vol (to the OTM calls) is bid in all three months. A fair question is, "is that normal for TTWO?" And the answer is... no.

I've included the Skew Tab from 7-5-2012 (Thursday) -- just before the bullish order flow started.



We can see quite clearly how the vol to the OTM calls was lower than the ATM and OTM puts, whereas now, the vol is elevated to those calls. In English, the bullish order flow has pushed the OTM call vol up and created a reverse skew shape. As those of you who read the blog regularly already know, this is one my favorite parts of the options market as it's one of the last places where we can observe in real-time the evolution of price discovery (unlike stocks when they halt and move in gaps). Very cool...

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



We can see across the top that the monthly vols are priced to 43.13%, 47.98% and 44.41%, respectively for Jul, Aug and Sep. I've highlighted the risk reversal today (in Dec) and the rather large OI in the Aug 10 calls that was established on Friday.

The flow and vol (and skew) point to the bet being made that "something" is coming in the next earnings announcement.

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