AVP - Wild Skew and Vol into Earnings with Takeover Rumors

Discussion in 'Options' started by livevol_ophir, Oct 27, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    AVP is trading $33.34, up 1.6% with IV30™ up 26.5% into earnings tomorrow before the open. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/10/avp_27.html">in the article</a>.

    <img src="http://www.livevolpro.com/help/images/blog/avp_summary_10-27-2010.gif" />

    <a href="http://www.livevolpro.com/help/free_trial.html"><img height="200" src="http://www.livevolpro.com/help/images/blog/lvp_trial_ad.gif" /></a>

    For a limited time we are offering a FREE real-time trial to Livevol Pro™ for non-professional traders. You can get your trial by following the directions here: <b><a href="http://www.livevolpro.com/help/free_trial.html">Click for Free Trial Offer</a></b>

    The company has traded 28,000 options in the first three hours on total daily average option volume of just 4,679. The action is in the front month calls, where over 25,000 have traded. The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/10/avp_27.html">in the article</a>).

    <img src="http://www.livevolpro.com/help/images/blog/avp_stats_10-27-2010.gif" />

    The Options Tab (<a href="http://livevol.blogspot.com/2010/10/avp_27.html">in the article</a>) illustrates the action and how it's really focused on the call side in Nov.

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/10/avp_27.html">in the article</a>) illustrates the vols by strike by month.

    <img src="http://www.livevolpro.com/help/images/blog/avp_skew_10-27-2010.gif" width="600" />

    Now we have something here. Very interesting skew shape going into earnings. The front month is completely inverted, a positive slope to the upside, and a downside that has lower vol by strike. To read what skew is and why it exists you can go here: <b><a href="http://livevol.blogspot.com/2010/01/solarfun-solf-call-purchases-with.html">Understanding Option Skew</a></b>.

    Finally, the Charts Tab (6 months) is <a href="http://livevol.blogspot.com/2010/10/avp_27.html">in the article</a>. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

    We can see the stock gapped up on 10-11-2010 on speculation of takeover... again... Since then the IV30™ has been ripping, well above HV20™ and HV180™. Today it has peaked, over 26% up or 52 vol.

    We can look at the Skew the day before the rumors (<a href="http://livevol.blogspot.com/2010/10/avp_27.html">in the article</a>):

    So, normal... And then, the day after the rumors (<a href="http://livevol.blogspot.com/2010/10/avp_27.html">in the article</a>):

    Pretty cool. Since that day, the skew has pretty much remained inverted, bid to the upside. It has become even more pronounced with the vol and order flow today. This upside skew makes for some very tantalizing trades, but ones that leave upside naked. Just a random example, the Nov 39/40 1x2 call spread can be done @ $0.25 credit. Whoa... A $0.25 credit for a call spread more than 20% OTM. Crazy... But, you know, the vols are priced like that for a reason...

    It would be a neat little trick to announce a takeover with an earnings release.

    This is trade analysis, not a recommendation.

    <b>Follow Live Trades and Order Flow on Twitter: @Livevol_Pro</b>

    Details, trades, prices, vols, skews, charts here:
    <a href="http://www.livevolpro.com/help/disclaimer_legal.html">http://www.livevolpro.com/help/disclaimer_legal.html</a>

    Legal Stuff:
    <a href="http://www.livevolpro.com/help/disclaimer_legal.html">http://www.livevolpro.com/help/disclaimer_legal.html</a>