NVS - Risk Reversal on Elevated Vol

Discussion in 'Options' started by livevol_ophir, Oct 14, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    NVS closed at $59.45, up 0.4%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/10/nvs.html">in the article</a>.

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    The company has traded 37,000 options on total daily average option volume of just 3,874. The action was in Jan'11 where 10,000+ 55/65 risk reversals traded buy puts/sell calls pay $0.45. Stock volume as about twice the daily average, my guess is these went up with stock, but I'm away from the floor for the next couple of days so I can't tell. The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/10/nvs.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/10/nvs.html">in the article</a>) illustrates that the Jan'11 risky was are mostly opening (compare OI to trade size). The Nov 60 calls feel like sales and are ambiguous to opening/closing. The Nov 65 calls look like purchases and are opening.

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/10/nvs.html">in the article</a>) illustrates the vols by strike by month. I have only included Jan'11.

    <img src="http://www.livevolpro.com/help/images/blog/nvs_skew_10-13-2010.jpg" width="600" />

    Buying puts and selling calls is what the skew is supposed to reflect and I'm not that familiar with how NVS "normally" looks. Nothing in the skew seems irregular to me though.

    Finally, the Charts Tab (6 months) is <a href="http://livevol.blogspot.com/2010/10/nvs.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). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

    We can see the stock has steadily climbed over the last couple of months. Finally, On the vol side (bottom), we can see the IV30™ has popped past the long term and short term realized.

    The Jan'11 trades bought 24 vol to sell 18 vol, contract neutral and paying $0.45 in premium, so it's a little long vega. Looking at the chart we can see:
    IV30™: 24.08
    HV20™: 13.56
    HV180™: 18

    So, IV30™ is elevated. Jan'11 is priced at ~21.5 vol, so it's a touch pricey as well. Normally selling the upside gamma in a bio-tech in a takeover bonanza market makes me vomit, but this is a $130 billion company, I don't see many takeover rumors it's future (watch tomorrow there will be like 3 bids or something... just kidding... probably...).

    I feel like the vol is elevated, but earnings are coming up in the Nov cycle. If vol rises higher into earnings and hits maybe low 30's, an ATM butterfly or just a short straddle might be an interesting trade to analyze, though risky.

    This is trade analysis, not a recommendation.

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    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/10/nvs.html">http://livevol.blogspot.com/2010/10/nvs.html</a>

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