Fair Value Reporting Rules Coming; Rating Agency Claims Bearish for Banks

Discussion in 'Options' started by livevol_ophir, Jun 29, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    CMA is trading $37.13, down 3.8% with IV30&#8482 up 15.5%.

    <img src="http://2.bp.blogspot.com/_hMry1m7UF10/TCo15JA90rI/AAAAAAAADPo/B8EuY1OIsp0/s1600/cma_summary.gif">

    Comerica Incorporated (Comerica) is a financial services company. Comerica operates through three business segments: the Business Bank, the Retail Bank, and Wealth & Institutional Management.

    Right now a proposal by the Financial Accounting Standards Board (FASB) would require banks to report loans and other financial instruments on its balance sheet at "fair value." (reference: Investopedia; Author: Eric Fox). You can read the whole article <b><a href="http://stocks.investopedia.com/stock-analysis/2010/Fair-Value-Proposal-For-Loans-HBAN-RF-CMA-BBT-USB0629.aspx?partner=YahooSA">By Clicking Here</b></a>. I'll summarize below.

    This fair value thing, in my opinion, will continue to grow in importance and garner more headlines as the details are hammered out. Basically Fitch (the rating agency, eh hem) released a study that declared over $130 billion in market cap would have been lost by the twenty banks studied if the proposal had been put in effect in Q3 of '09. This represented ~ 14% of total cap.

    So, in their eyes, this would take the financial sector - banks specifically, down pretty hard. Of course, an "efficient market" believer would say that the conclusion makes no sense given that the data is publicly available (to a great extent). I guess I just see it pretty simply. Banks do great things - without our banking system the US would not be what it is today. But...

    ... They're also <i>Dirty Rotten Scoundrels </i> (love that movie).

    For this article, I'll just focus on one of the banks that this could effect, a smaller one - CMA.

    First, the tick chart is included (<a href="http://livevol.blogspot.com/2010/06/cma.html">in the article</a>).

    We can see the front month vol (bottom chart) spiking as the stock tumbled (top chart).

    The company has traded over 22,000 options on total daily average option volume of just 4,692. All but 607 contracts have been puts. The largest trade has been an Aug 32.5/37.5 put spread purchase 7,500x (i.e. 15,000 contracts). The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/06/cma.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/06/cma.html">in the article</a>) illustrates that the puts are opening (trade volume >> OI). Note also that earnings are projected for the start of the Aug cycle (though they may slip into July). The 5,000 July 40 puts are sales on 10,000 long OI (best I can tell). In other words, they're closing, while the put spread is opening.

    <b>Trade Stats</b>
    Buy 7,500 Aug 37.5 puts for $2.50
    Sell 7,500 Aug 32.5 puts @ $0.80
    Debit: $2.50 - $0.80 = $1.70
    Total Cost: 7,500 * 100 *($1.70) = $1,275,000
    Max Gain (Stock <= 32.5 at expo): $2,475,000

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/06/cma.html">in the article</a>) illustrates the vols by strike by month.

    You can see a normal lookin' skew. July is pretty steep as there is a nickel bid in the 30 puts.

    Finally, the Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/06/cma.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    The 52 wk. range for CMA is [$19.94, $45.84]. The spread bets on the stock going below $36 (ish). You can see the IV30&#8482 is just now spiking past the HV20&#8482.

    This is trade analysis, not a recommendation.

    Details, prices, trades, vols, skews, charts here:
  2. 1) Who determines what "fair value" is?....The banks? :eek:
    2) WTH? :(
    3) Ruprecht! :D
  3. livevol_ophir

    livevol_ophir ET Sponsor

    1) I think so.
    2) Agreed
    3) "Why does he have a cork on his fork?"