McGraw Hill (MHP) - Puts, Volatility and the Oracle of Omaha
McGraw Hill (MHP) - Puts, Volatility and the Oracle of Omaha
At the time of this post, MHP is trading 32.64, down $1.15 with IV30ô up 20.4%. A market snapshot is below.
The company traded over 4,800 options in the first hour on total daily average option volume of just 595. All but 287 contracts have been puts for a 16:1 put:call ratio. The largest trades have been put purchases in the back months. The Stats Tab and Day’s biggest trades snapshots are included (click either image to enlarge).
The Options Tab (click to enlarge) illustrates several things:
- Aug 30 puts are most active - from what I can tell that OI is long as well, so this is a "double" down.
- The OTM puts in Jan ’11 are trading (purchases). I believe (but not sure) that existing OI in Jan ’11 25 puts is also long. I can’t tell in the Jan ’11 30 puts.
- The Nov 25 and 30 puts are also trading in Nov - purchases on low open interest - these are opening bets.
- MHP probably has earnings in the Aug cycle - note the vol at the top. It’s lower in August than May. Although earnings are a known vol event, the summer is generally very slow and vol tends to bottom in August. Interesting...
The Skew Tab snap is included (click to enlarge).
You can see the shape in general is pretty normal on the downside - a bit under stated on the upside (i.e. there is usually a flattening out to the upside - that isn’t the case here). You can also see the front month (red) is above the earnings month (green).
Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30ô - red vs HV20ô - blue). The yellow shaded area at the very bottom is the IV30ô vs. the HV20ô vol difference.
MHP has sputtered over the last few weeks, dropping more than 10% as IV30ô rises. The rating agencies are on the hook and have been for a while - but they always seem to skate free. They even got a nice little comment from the Oracle of Omaha himself, Mr. Warren Buffet calling them and other rating agencies: "incredibly wonderful businesses." Click for Reference.
Maybe the tide will turn - the government will actually follow through on GS and then the agencies... or not...
If you’re in the "not" camp - calls are relatively cheap to puts (see skew tab), and especially in the earnings month (which has low vol relative to May). If you’re in the "tide will turn" camp - spreading the earnings month may be a play.
This is trade analysis, not a recommendation.
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About Ophir Gottlieb
Ophir has worked as an equity option market maker and prop trader on the NYSE ARCA exchange floor since Feb. 2008. Prior to working on the exchange floor, he worked as a structurer on the Countrywide trading desk and before that as the Director of Client Services and Research for the quant modeling firm Audit Integrity. He has a Masters degree in Financial Mathematics from Stanford University. He also has an MBA in finance and an undergraduate degree in quantitative economics with an area of focus in mathematics.
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