KWK - Vol Play on Takeover News

Discussion in 'Options' started by livevol_ophir, Oct 21, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    KWK is trading $15.76, with IV30™ at 42.42 . The <a href="">LIVEVOL™ Pro Summary</a> is <a href="">in the article</a>.

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    <a href=""><img height="200" src="" /></a>
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    The stock popped on 10-18-2010 from this news:
    KWK was the biggest percentage gainer on the New York Stock Exchange on Monday after the possibility of a take-private deal came to light, but it's debatable how "substantial" the potential premium for any eventual transaction would end up being.
    Source:<a href=";cm_cat=FREE&amp;cm_ite=NA"></a>

    Note that the Darden family apparently owns 30% of the stock (source: Yahoo! Finance).

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

    <b>Custom Scan Details</b>
    Stock Price&nbsp;&gt;= &nbsp;$7
    IV30™ - HV20™&nbsp;&lt;= -8 &gt;= -40
    HV180™ - IV30™ &gt;=7
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech
    Days After Earnings &gt;= 32

    The snapshot of the scan is included (<a href="">in the article</a>) in case you want to build it yourself in Livevol Pro™.

    <img src="" width="600" />

    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 KWK Charts Tab is included (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

    We can see:
    IV30™: ~42.42
    HV20™: 61.05
    HV180™: 51

    So, IV30™ is depressed relative to the short term and long term realized movement of the stock. Keep in mind though, before the pop in stock price the HV20™ was just 27. So the vol isn't an obvious purchase. But, I like the news aspect, so let's take a deeper look.

    Finally, let's look to the Options Tab (<a href="">in the article</a>).

    <b>Possible Trades to Analyze</b>
    1. Buy-write. Yes, I know I said the vol was low, but buying the stock and selling the Oct 16 calls is one way to play this takeover/private news.

    2. Buy the Nov 15/16 strangle, sell the Nov 14/17 strangle and pay a total of $0.50 (those are hard prices). That turns the MaxGain:MaxLoss to 1:1 and just bets on the stock being outside of [$14.50 ,$16.50] by Nov expo. It does purchase the "lowish" vol, but also hedges nicely the vega that could go down and die the premium that could die to theta.

    3. Ok, I ran out of ideas after #2....

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:
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