Nexen: Huge Vol Diff Opens, Implied Rises 250% Since Deal Announcement

Nexen Inc. (NXY) is an independent global energy company. The Company’s conventional oil and gas assets consist of large acreage positions in select basins, including the United Kingdom North Sea, deep-water Gulf of Mexico and offshore West Africa.

I found this stock using a real-time custom scan I built in Fidelity. This one hunts for calendar spreads between the front two monthly expiries.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 > 7
IV30™ GTE 30
Average Option Volume GTE 1,200

But the real news behind this company occurred on 7-23-2012, when a takeover bid was made and agreed upon. I wrote about that day b/c of some apparent insider trading. You can read that blog here:

Nexen (NXY) - Pre-Takeover Order Flow Looks Like Insider Information; How to Make $32 million (3,200%) in a Week

Today I note the rise in vol and even more interesting, the rather dramatic calendar spread that has opened up. Let's start with the six-month Charts Tab, below. The top portion is the stock price the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).


On the stock side we can see the abrupt gap up on the takeover news and then the quiet period following. I do note the recent stock movement which has moved from absolutely still waters to more bumpy.

On the vol side, the story begins to unfold. Check out the rise in the implied of late. At the time of the takeover announcement IV30™ dipped to 25.88%. Today we can see the implied has risen to nearly 90%. So, a huge increase in risk as reflected by the option market.

Let's turn to the Skew Tab and we'll see a very interesting term-structure shape.


Note that for all three front expiries the upside skew slopes down, or said differently, the downside risk rises rather abruptly from the upside risk. This happens in a takeover when the upside is capped (the takeover price) but the downside is left open (if the takeover doesn't go through). What's remarkable here is the rather massive vol diff between the front three months -- and in particular between month 1 and month 3. Something is coming up in Dec -- a finalization, a decision, a vote, a something...

Finally, let's look to the Options Tab (below).


Across the top we can see the monthly vols are priced to 93.87%, 72.88% and 52.56%, respectively for Dec, Jan and Mar. While Dec and Jan overall show a ~21 point vol diff, look at the Dec/Jan 20 put spread -- that shows a 27 vol point diff. Similarly, Dec to Mar shows a ~40 vol point diff, but the Dec/Mar 20 put spread shows ~50 vol point diff. Although the spreads look compelling, this could easily be one where owning the vega in Jan or Mar could be a huge loser with the options literally going to zero if the deal is finalized. Ya know... or not...

Disclosure: This is trade analysis, not a recommendation.

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