Option Anomaly

Today a recent retail favorite is getting slammed, probably by short sellers and profit takers, given its tremendous price rise and earnings announcement that surprised to the upside.

That stock, NTI (Northern Tier Energy) was upgraded by several brokerages when their first (partial quarter) dividend of $1.48 was announced a few days ago. One brokerage, Deutsche Bank, lowered its rating, but left the price target at $25.

As we speak, it’s down about $2 and trading around $22.50.  The options, though, seem mispriced.  I’m guessing that most of the mispricing comes from the dividend that’s about to pay, but my online stock trading platforms are showing the December $22.50 calls at implied volatility around 25%, and the puts at implied volatility three times that.  I’m looking at buying the calls and/or selling the puts.

If I get exercised on the puts, my net cost will be $20.50 per share, and even the Street firm with the bearish outlook expects the stock to trade at $25.  Others expect the stock to trade to the high 20’s or even $30 a share.  And $2 a share in estimated quarterly distributions looks pretty tasty, though potentially ephemeral.

It’s a dicey play, in that the company owns exactly one refinery.  And refinery business earnings are notoriously volatile, since the integrated oils can keep running their refineries when the “crack spread” doesn’t work economically, but these guys won’t have that luxury.

Still, the next quarter is basically in the books already, so if I end up owning these suckers, I’ll get a couple of more bucks to ease the pain.

Wish me luck.  I may need it.



5 Responses to Option Anomaly

  1. Tim Baker says:

    Complete agree with you on this trade. Company has a competitive advantage with Bakken and WCS feedstock. We only need not go into recession!

  2. Is it possible that the implied volatility calculation is omitting the dividend payment in Nov?

    • hhill51 says:

      That’s what I’m guessing.

    • hhill51 says:

      OK, Dan, we have our answer. It was only partially the upcoming distribution (I’m very specific using that word instead of dividend, because this is an MLP, and that money can be poison in a retirement account being called “UBTI”)…..

      If the implied vols were simply based on the payment, today they would be spread wider, but they’re not. At the moment, I see 30% and 67% implied vols on the calls and puts respectively, a shift from yesterday’s 25% and 75%. If the calculation was being “fooled” by that $1.48 payment, the decrease of one day of time value in a one month option would push the spread wider in implied vols. I hate to think that I have to model this pricing myself rather than using the calculated values my brokers give me. What a PITA. Just building the stock price database to measure historic vols is more than I feel like doing….

  3. George Maniere says:

    Great trade. I wish you luck because you deserve it. More posts on VF please.

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