optionvol-NBC-Bay-Area

MMR is trading $12.72, down 2.1% with IV30™ down 5.6%. The LIVEVOL® Pro Summary is below.



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McMoRan Exploration Co. (McMoRan) is engaged in the exploration, development and production of oil and natural gas in the shallow waters (less than 500 feet of water) of the Gulf of Mexico and onshore in the Gulf Coast area of the United States.

This is an elevated vol note in a stock which as some peculiar vol patterns that I've discussed before. The implied has reached the level where it makes it a story again...

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 a rather bumpy ride over the last year, though endpoint-to-endpoint the stock price change isn't that large. The 52 wk range in stock price is [$7.76, $16.57]. This one is all about the vol, though...

On the vol side we can see how elevated the implied is to both the short-term and long-term historical realized vol measures. In fact, that's just sort of the norm for this name - a vega sellers dream.

But, even more apparent is the recent vol spike. On 10-22-2012 the IV30™ was 61.70%. Today the implied is sitting at 115.87% or an 88% rise in less than a month. Note that the vol has risen during this period even though there was an earnings announcement on 10-19-2012 BMO. The 52 wk range in IV30™ is [58.69%, 122.80%], putting the current level in the 89th percentile.

Let's turn to the Skew Tab-- we'll get a window into when the risk is centered.



We can see how Nov ATM vol is well below the back two expiries. Even more noteworthy, we can see how elevated Dec vol is to Jan. Note hat the next earnings release should be near the week of Jan'13 expo -- so it might actually be in that expiry. The last two Jan earnings announcements were made on 1-18-11 and 1-17-12 and this Jan cycle expires on 1-18-2013. Tricky... even more telling is how elevated Dec is to Jan even with all of that " earnings stuff."

Finally, let's turn to the Options Tab.



Across the top we can see the monthly vols are priced to 70.37%, 115.47% and 101.78%, respectively for Nov, Dec and Jan'13. The risk is in Dec -- let's see what happens. Will the pattern continue -- a stock that shows an implied trading above the realized stock movement, or will the stock finally move abruptly enough to make owning vega the winner?

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VRSN is trading $41.70, down small with IV30™ up 1.9%. The LIVEVOL® Pro Summary is below.



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VeriSign, Inc. (VeriSign) is a provider of Internet infrastructure services. The Company provides domain name registry services and infrastructure assurance services. VeriSign segment includes Naming Services, which consists of Registry Services and Network Intelligence and Availability (NIA) Services.

This is a vol note, specifically elevated vol after an earnings move. 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 it's pretty easy to see the cataclysm that was the last earnings release. The stock dropped from $46.60 to $39.39 in a day, and then fell to $37.07 the following day. Here's a news snippet from that release:

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The big news was that regulators have delayed the review of VeriSign's contract for its domain name registry business. The review was expected to be completed by the end of next month by the Commerce Department, but VeriSign said regulators may not finish on time. That adds major uncertainty in the near-term for what some analysts had considered a "formality."

Source: The Motley Fool via Yahoo! Finance; Why VeriSign Shares Got Hammered, written by Evan Niu, CFA.
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Not only did the stock fall, but that news in fact raised risk (read: vol), and has catapulted VRSN's IV30™ to near annual highs. The 52 wk range in IV30™ is [18.77%, 50.63%], putting the current level in the 94th percentile.

The vol level though is even more impressive when we look at a year chart with IV30™ isolated. I have included that below.



This chart makes it so much easier to see how elevated and how abruptly the vol has moved on this news.  Let's turn to the Skew Tab, below.



We can see the monotonic increase in vol from the back to the front with a notable parabolic skew shape in the front reflecting both the potential for upside moves and downside moves. I am a bit surprised that Dec or Jan'13 (or both) don't reflect parabolic skew as well. It seems that while risk is certainly elevated, given the stock drop on the news, there is the potential for a stock rise as well... right?...

Finally, let's turn to the Options Tab.



Across the top we can see Nov, Dec and Jan'13 are priced to 52.46%, 48.84% and 45.90% vol, respectively. There are really two phenomena I note here:

1. The vol seem low given the news and the impending risk of the next announcement -- I mean, look at that stock reaction...

2. Again, the lack of upside skew in the back months is a little... confounding...

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IGT is trading $12.66, down 1.8% with IV30™ exploding up 35.9%. The LIVEVOL® Pro Summary is below.



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International Game Technology (IGT)is a global gaming company specializing in the design, development, manufacture, and marketing of electronic gaming equipment and systems products, including online and mobile solutions.

The company has earnings due out today AMC but it caught my attention because of the high option volume (relative to average) scan – it’s the top result in the entire market – as well as the vol explosion.

Let’s turn to the Stats Tab and day’s biggest trades sections, below. We can see that IGT has traded nearly 18,000 contracts on a total daily average of just 1,345. Calls have traded on a 4.5:1 ratio to puts.





The action is in the front month 13 calls – and that’s really what caught my eye. We can see from the day’s biggest trades (above) that essentially every large trade today has been in those calls. The flow looks long to me based on circumstantial evidence of vol rising and the prices relative to the NBBO.

Let’s turn to the Options Tab.



I’ve highlighted the Nov 13 calls – check out that volume which is nearly 11,000 in the first four hours of trading in a stock that had a total existing OI of just 57,000 before today. We can also see the existing OI in that line is substantially smaller than the trade size – these are opening positions.

While the option volume is more than 1300% its daily average in the first four hours of the day, the stock volume is still below the daily average. If we extrapolate the stock volume from this point to the end of the day, it will be a heavy stock trading day, but maybe in 120%-130% higher than average level – nothing close to the 2000% range the option volume will likely see.

Let’s turn to the IGT Charts Tab below (one year). The top portion is the stock price the bottom is the vol (IV30™ - red).



On the stock side we can see some pretty poor performance over the last six months. But even more eye popping is the stock move off of the last earnings result in mid-July (circled in yellow). The stock dropped from $14.69 to $11.76 or a 20% drop in a day.

On the vol side we can see that the IV30™ hit 52.53% right before that earnings announcement and at the time, that was highest level IV30™ had reached in this time period we’re examining (note that I have circled that vol level).

Today, however, the vol is absolutely exploding, with IV30™ up 35%. The 52 wk range in IV30™ is [28.36%, 52.56%], so the level today is well into new annual high territory. In fact, the level today is a multi-year high.

I’ll skip the Skew Tab as the image isn’t needed – Nov is extremely elevated to Dec. In fact, we can look at the top of the Options Tab (above) and see that Nov vol is priced to 85.33% up nearly 30 vol points today, while Dec is priced to 48.77%, up 7.5 vol points.  One thing I do note, and it's a big one, the skew in the Nov 13 calls does not show a kink -- so there is no price discovery going on.  That might mean two-sided trading... just a "might."

Ultimately this is a fascinating stock today. Earnings are due out AMC and vol has exploded to a multi-year high while the OTM front month calls are trading size and the last earnings report saw a large gap in the stock price the next day. This is definitely one to watch.

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MS is trading $16.72, down 8.1% with IV30™ up 12.2%. The LIVEVOL® Pro Summary is below.



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Morgan Stanley is a global financial services company that, through its subsidiaries and affiliates, provides its products and services to a range of clients and customers, including corporations, governments, financial institutions and individuals.

This is a vol note on a stock that is reacting abruptly to the election (or something), and has a vol pattern developing that caught my eye, along with a vol diff between expiries.

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 the actual 6-month holding period return is pretty modest with the stock rising from $16.15  to now $16.78. More interesting is the initial drop and then rather abrupt recovery in MS since late summer. And then today happened... the 52 wk range in MS stock price is [$12.18, $20.99].

But this is a vol note. We can see the turn up in IV30™ today, but it's actually the longer-term annual trend that caught my eye. I've included the annual IV30™ chart below.



We can see two enormous spikes in IV30™ over the last year -- neither of which surrounded an earnings release (note the blue "E" icon denotes earnings dates). What really caught my eye is the pop in vol over the last few days. Yes, I know, there was some sort of election or something that happened yesterday, and the market is down size today (so VIX is popping), but how's this for a stat: on 10-22-2012 the IV30™ hit the bottom one percentile (annual) for MS. Since then, it has rocketed above the earnings vol level. The 52 wk range in IV30™ is [33.40%, 82.07%], which puts the current level in just the 19th percentile annual.

So what? I see a stock whose implied is rising rapidly after hitting essentially an annual low, yet even with the rise is still in the bottom quintile (compared to its own history) of annual vol.

The Skew Tab, below, shows us even more.



I have included the Nov09 weekly options in there for a complete picture. The notable phenomena here are:

1. There is a monotonic increase in vol from the back to the front.
2. The Nov monthly options (yellow curve) show a parabolic skew which reflects both upside risk (potential) and the normal downside risk.

Finally, let's turn to the Options Tab.



Across the top we can see the monthly vols are priced to 44.60% and 41.35% for Nov and Dec, respectively. Those Nov09 weeklies are priced to over 50% vol. It seems to me that there is some "settling in" that has to occur due to the election, but beyond that, there's some "settling in" that has to occur b/c we don't really have a good idea of which way the economy is going. It seems like the vol rise in MS makes sense, but the vol level... feels low, no?... Would you say the vol in MS right now should be in the bottom quintile (over the last year)? I dunno... feels weird(ish)... or not...

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NFLX is trading $76.97, down 1.6% with IV30™ up 3.1%. The LIVEVOL® Pro Summary is below.



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Netflix, Inc. (Netflix) is an Internet subscription service streaming television shows and movies. The Company’s subscribers can watch unlimited television shows and movies streamed over the Internet to their televisions, computers and mobile devices, and in the United States, subscribers can also receive digital versatile discs (DVDs) delivered to their homes.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.



The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Let's turn to the Skew Tab to illustrate the vol diff.



I note three phenomena here:

1. Most notably, the Nov monthly (yellow curve) options are priced well above he Dec (green curve) in terms of vol.
2. Both Nov monthlies and Dec show a parabolic skew shape -- reflecting both upside risk (potential) and downside risk greater than the ATM options.
3. Check out those Nov weekly options expiring on Friday. They have a ripping upside skew.


Now we can 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 finally see a six-month window where NFLX stock actually looks like it provided positive returns. Of course, the stock was also over $300 less than two years ago.

On the vol side I do note an interesting vol diff between the implied and the two historical realized vols. In English, the implied vol is trading below both the long-term and short-term historical realized movement of the stock. Hmm...

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



Across the top we can see the monthly vols are priced to 67.10% and 57.25% or Nov and Dec, respectively. An interesting position to examine would be one that is long the Dec upside, funded by a sale of Nov weekly upside. If that position works, then selling the Nov monthly upside again to fund that long Dec option. Since NFLX has weekly options, hypothetically the position could be walked up a few more times to the point where the Dec upside was entirely funded by front expiry sales. Ya know, or not...

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I’ve included the Fidelity Symbol Summaries for four major players in the Defense Sector, below.



General Dynamics Corporation is an aerospace and defense company that offers a portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; military and commercial shipbuilding, and communications and information technology.



Lockheed Martin Corporation is a global security and aerospace company principally engaged in the research, design, development, manufacture, integration, and sustainment of technology systems and products. The Company also provides a range of management, engineering, technical, scientific, logistic, and information services. It serves both domestic and international customers with products and services that have defense, civil, and commercial applications, with its principal customers being agencies of the United States Government.



Northrop Grumman Corporation (Northrop Grumman) provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers.



Raytheon Company, together with its subsidiaries, is a technology company specializing in defense, homeland security and other government markets worldwide. The Company provides electronics, mission systems integration and other capabilities in the areas of sensing, effects, and command, control, communications and intelligence systems (C3I), as well as a range of mission support services.

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We can see they’re all down small. What isn’t quite apparent is that the IV30™’s are all rising into the election. On the day the IV30™ gains are:

GD: +10.0%
LMT: +12.2%
NOC: +9.3%
RTN: +13.4%

This is another industry note, similar to the one I posted on Friday for managed health care.

In any case, today we’ll go evergreen here and examine the defense sector and the risk embedded in that industry due to the upcoming presidential election. Let’s start with four Skew Charts. The red curves represent the Nov options while the yellow curves represent the Dec options.

GD


LMT


NOC


RTN


What we can see quite clearly, across all four names is that the front month is elevated to the back (i.e. the red curve is above the yellow curve). That vol difference is increasing today and my best guess will expand even further tomorrow (depending on how the mid-day polling goes).

I have included just the vols by expiry below for each of the four names – note the increases in Nov vol relative to Dec for each of these four.

GD


LMT


NOC


RTN


I know that’s a lot to look at and digest, but just focus on the Nov and Dec vols and the changes. To make it a touch easier to read, I’ve included a summary table below:



Note that I used percentage changes in the Nov and Dec Expiry Rise fields to make comparisons a bit easier. The vol correlation is incredibly high, where we see a range of [14%, 18%] for Nov vol increase and [5%, 7%] in Dec vol increases. We can see a bit more clearly now how the IV30™’s are rising and while vol is up in both Nov and Dec, it’s Nov that is showing the greatest move. In English, risk as reflected by the options market, is rising across the board, with the nearest-term options (Nov) showing the greatest risk.

As I wrote in a prior article, this could be another case where an industry specific reaction will dominate any correlation to the overall market. That is, this industry’s correlation to the market may tend to zero as the singular event that is tying them together unravels (the presidential election).

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I've included the Symbol Summaries for AET, CI, UNH and WLP below.









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This is a simple vol note on the health care industry -- specifically the managed care group. It appears that he election has embedded a risk premium in the front months and I thought it was worth noting.

Let's jump right into it and look at the front two-month skews for AET, CI, UNH and WLP, respectively, below.

AET


CI


UNH


WLP


We can see across the board the similar shapes of the skews and even more pronounced, the vol diff between the front and second monthly expiries. One mitigating factor for WLP is that earnings are also due out in the Nov cycle (11-7-2012 BMO) -- so that vol "should" be elevated to Dec.  A fair questionis, is it elevated enough?

What's even more interesting is that AET and UNH also have weekly options. Check out the vols for the Nov09 weekly options, Nov monthly options and Dec options respectively, below.

AET: 43.00%, 35.24%, 27.91%
UNH: 40.05%, 32.32%, 24.43%

So we can see the risk premium is embedded in the near-term -- the election near-term (which is 11-6-2012).  There is a monotonic rise in vol from the Nov09 weeklies to the Nov monthlies to the Dec monthlies.

I'll skip the Options Tabs and Charts Tabs as my focus here really is the immediate-term risk in the large managed health care companies and the extra premium attached to the election. Pretty cool... This is a good time to remind of the article I posted about ObamaCare, which you can read here:
Obama Care - Why it Matters to Options, How Vols Explode While Industry Correlation to Market Moves Toward Zero.

This could be another case where an industry specific reaction will dominate any correlation to the overall market. It's also an interesting examination of WLP and its earnings cycle -- is that vol priced correctly?  Feels like maybe the vol event is getting diluted...Ya know... or not...

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