**UPDATE - CMC - Takeover Rumors, Skew Bend

Discussion in 'Trading' started by livevol_ophir, Feb 23, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    ** UPDATE

    CMC is trading 16.64 with vol up another 3 points.

    You can read the original post from yesterday by <a href="http://livevol.blogspot.com/2010/02/cmc.html"><b>CLICKING HERE</b></a>.

    The buzz started on this news:
    "Commercial Metals returned an earlier call place to the company and confirmed that they have canceled their presentation at the Morgan Stanley Global Basic Materials Conf. In addition, CMC also confirmed that the cancellation was the result of personal issues being experienced by the presenter."

    The company traded more than 40,000 options yesterday on average option volume of 1,378 (as of yesterday). The vol went from 45 to 61 and now has gone up to 63. Today the company has traded over 17,000 options in the first 3.5 hours (the daily average jumped to 2,146). Further, the call: put ratio is 6:1 with most action in the Mar 17.5 calls again. The Stats Tab and Day's biggest trades snapshots are included in the article.

    The Options Tab (in article) illustrates the growing OI in that line. Most of the trades today have been purchases, that OI should increase tomorrow. Note also the distinctly higher vol in the front months relative to the back.

    Yesterday we were able to see the upward bend in the skew for the OTM calls while it maintained its downward bend as well. This created a parabola like shape for the front month (in article).

    The skew today is even more pronounced in that the downside for the front months is now flat (or flatter) while the upside remains bid (in article).

    This is a little surprising as takeover "rumors" have a tendency to come and go pretty quickly. The persistence is slightly unusual.

    The Charts Tab snapshot is included (in article). Note the recent run up in stock price and vol (both historical and implied)

    The bottom portion of the chart are the vols: IV30&#8482 (red) vs. HV20&#8482 (blue). The yellow shaded area charts the vol difference.

    If the payoffs were 1:1 (this is an obtuse hypothetical of course) this seems like a sale to me (i.e. I would bet it doesn't happen). But - obviously the odds aren't 1:1. In fact, if you assume a $25 price target (total random conjecture on my part), then look at the Mar 17.5 calls (where all the action is).

    Buy 1 Mar 17.5 call for 0.80. Stock taken over ---> sell @ 7.5. The payoff is 7.5:0.8 i.e. ~ 9:1. Feels like a bunch of nothin' is gonna happen, but losing 1:9 - prob not a great bet to put on - at least not real big. Of course, a takeover could happen for less, more or after March expo so...

    It is interesting to note that Mar vol is hgher than Apr even though earnings fall into Apr options. This is a slight implication of movement <i>this</i> month - i.e. a possible confirmation of a takeover, or a confirmation of not a takeover.

    This is trade analysis, not a recommendation.

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