The top name on the Optionshouse Covered Call Investigator tool today is Rambus (RMBS). This tool is beneficial in finding potential options where implied volatility is greater than in recent historical volatility, and could potentially present attractive returns by overwriting.
However, always be aware of the upcoming events that may be causing this implied volatility to spike. Earnings, of course, are regularly scheduled events that have a regular impact on spiking implied just prior to the announcement. A quick check of the news on the streaming charts and news tool has the following story from January 5th:
Rambus (RMBS) is recently down $3.79 to $20.28. Rambus antitrust case against several memory manufacturers is scheduled to go to trial on January 11. Rambus has accused Hynix, Micron (MU) and Samsung – the defendants in the case – of eliminating competition and stifling innovation in the computer memory technology and computer memory chip market. The International Trade Commission is expected to make a decision in Rambus’ patent infringement case against NVIDIA (NVDA) in January. RMBS January option implied volatility is at 157, February is at 134; verses its 26-week average of 87 according to Track Data, suggesting larger price movement.
This is a classic case of all indicators pointing to high volatility when the volatility is not necessarily high. This upcoming legal event changes how traders can look at implied volatility.
Further research finds that the estimated impact of the upcoming trial varies greatly. Some estimates of damages potentially won by RMBS range to as high as 12 dollars a share. Obviously the outcome and impact of the trial is unknown, what the implied volatility spike in RMBS does tell us, however, is that the market expects an outsized move. The market estimate of the timing around the event can also be seen by the current implied volatility levels January 85%, February 94% and May 94%. To me, this shows that the decision could come before February expiration, but with all legal issues, delays are possible pushing back the event past February. This trial was first thought to occur in September of last year.
The lesson to be learned today is often what appears to be high volatility may not be really that high.
Photo Credit: SamGrover
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Tags: Covered Call Investigator Tool, high volatility, Rambus, RMBS
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