Volatility Trading Digest - Takeover File, IV Change, and More
Takeover File
In addition to being a new entry in the Takeover File, this company also ranked number one in Friday's positive IV Change scan.
MetroPCS Communications, Inc. (PCS)
Just as PCS and Deutsche Telekom AG, the parent company of T-Mobile, settled upon a merger deal, rumors began circulating that Sprint Nextel Corp. (S) may also have an interest. Since the shareholders and regulators must approve the merger, any Sprint involvement would delay or even scuttle the proposed PCS/T-Mobile deal.
The option data follows.
The current Historical Volatility is 65.81 and 64.47 using the Parkinson's range method, with an Implied Volatility Index Mean of 76.45 up from 62.59 last week. The IV/HV ratio is 1.16 and 1.19 using the range method to calculate the HV. Friday's put-call ratio was a bearish 1.25, while the volume was 268,692 contracts traded compared to the 5-day average volume of 135,950.
Since the options expiring on October 20 are elevated the October 12 put looks like a very interesting sale, but then so does the October 12 call since we do not think there will be any resolution in the next two weeks. Accordingly, we suggested selling both and then hedging them with a long February straddle.
First, the October 20 options adjusted for the estimated weekend time decay,
Next the February options,
At the October expiration, one or the other option will be in-the-money. If it is the put, which seems unlikely take the stock by assignment and then sell a call in November. If call is in-the-money be prepared to buy stock before the close on October 19 to cover the short call that will be assigned. In the event Sprint does become involved, there could be many months of trading around the long February straddle.
Active Options
Here is one included in our October Volatility Kings list with active Friday call volume.
Netflix, Inc. (NFLX)
The current Historical Volatility is 55.70 and 42.26 using the Parkinson's range method, with an Implied Volatility Index Mean of 67.96 up from 61.99 last week. The IV/HV ratio is 1.22 and 1.61 using the range method to calculate the HV. Friday's put-call ratio was just bearish at .80, while the volume was 84,654 contracts traded compared to the 5-day average volume of 78,380.
Scheduled to report earnings on October 23, after the close, the consensus estimate is .05 per share.
Up 22% this week on upgrades from both Citigroup analyst Mark Mahaney and former bear Whitney Tilson. Mahaney reiterated his buy rating and 120 price target, citing improving customer satisfaction, which seems odd citing improving customer satisfaction as the upgrade justification coming this soon before the earnings report, which leads us to wonder if Mahaney knows more than he is saying.
If so, we suggest going with the flow by using a short-term call spread that will expire before the report date since the implied volatility for the October options that expire before the report date are a good bit lower than the November options that expire after the report. For example, the October 65 straddle has an implied volatility of 50.62 while the November is 71.71.
Here is the call spread using the October options adjusted for the estimated weekend time decay
Use a close back below support at 60 as the SU (stop/unwind).
IV Change
Friday, we had an interesting biotech in the number two scan spot for increasing implied volatility.
Questcor Pharmaceuticals, Inc. (QCOR)
After news that Aetna took away reimbursement for the company's flagship HP Acthar Gel the stock dropped 48% on September 19. However, other insurers say they will cover the gel and the stock has stabilized at just under 20.
While we do not know any more about the drug or its futures prospects, we know something about high-implied volatility and options volume.
The current Historical Volatility is 238.01 and 158.65 using the Parkinson's range method, with an Implied Volatility Index Mean of 107.85 down from 110.60 last week. The IV/HV ratio is .45 and .68 using the range method to calculate the HV. However, the 10-day range HV is 85.90. Friday's put-call ratio was a bearish 1.35, while the volume was 30,728 contracts traded compared to the 5-day average volume of 14,930.
Here is an October put sale idea with the price adjusted for the estimated weekend time decay.
In the event it the stock closes below 16 at the October expiration in two weeks be prepared to take the stock by assignment and then sell calls against the long stock.
High IV/HV Ratio
We offer the Top 5 on our home page in the Rankers and Scanners section as a regular feature. The high IV/HV ratio is the first alert that something unusual is happening as the options prices have been bid up to abnormal levels. From there a little more investigation will usually provide the answer as to the likely direction. This stock ranked number four on Friday's scan with a 1.98 ratio.
Amarin Corporation plc (AMRN)
After receiving FDA approval for the limited use of Vascepa for treatment of hypertriglycerdemia, the stock increased from 11 to 15. Now they are seeking approval to use Vascepa for lower levels of triglycerides. The recent decline from 15 back to 11 was to be the result of a brokerage downgrade due to declining confidence in an immediate acquisition, however they set a 15-price target, higher than the current level. Previously we suggested a put sale when it was 11.93
The current Historical Volatility is 55.86 and 45.08 using the Parkinson's range method, with an Implied Volatility Index Mean of 110.51 up from 104.53 last week. The IV/HV ratio is 1.98 and 2.45 using the range method to calculate the HV. Friday's put-call ratio was bullish at .42, while the volume was 9,864 contracts traded compared to the 5-day average volume of 27,990.
Based primarily upon the high IV/HV ratio here is another put sale to consider.
Use a close below 11 as the SU (stop/unwind) or be prepared to take the stock by assignment in the event it closes below 12 at the October expiration.
The October suggestions above use the closing middle price between the Friday bid/ask price, but have been adjusted to reflect the estimated time decay over the weekend. Monday, the option prices will still be somewhat different due to any price change. The February options are unadjusted for weekend time decay.
Summary
The near term uptrend remains intact, but some selling can be expected at the September 14 resistance high at 1474.5. In the absence of any negative news from Europe, the markets will be focusing attention on 3Q earnings reports.
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