Ocwen Financial: Multi Year Highs In Vol And Price As Earnings Approach

Ocwen Financial Corporation (OCN), through its subsidiaries, is a provider of residential and commercial mortgage loan servicing, special servicing and asset management services.

This is a vol note, specifically a firm that is breaching a new multi-year high in vol. Let's start with the Charts Tab (six months), 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 impressive rise in price rising from $15.80 on 3-28-2012 to now over $27. As of this writing, the stock is up 73% over the last six months. We can also see that in the last earnings cycle (check out the blue "E" icon) OCN moved higher on the news. The 52 wk price range is [$11.72, $28.66], so the stock is nearing an annual high, and in fact, that annual high is a multi-year high. But the story gets more compelling when we turn to the vol.

On the vol side we can see how elevated the implied has become -- shooting straight up from 35.96% on 9-21-2012 to now just under 59%. That's a 63.5% rise in IV30™ in just seven calendar days. The only news story I could find was one from Briefing on 9-19-2012. I've included that snippet below:

Compass Point is initiating coverage of NationStar Mortgage (NSM) with a Buy and a $38 tgt, Walter Investment (WAC) with a Buy and a $46 tgt, and Ocwen Financial (OCN) with Buy and a $33 tgt. Firm says while these names have had a huge run lately and valuations have been stretched, the longer-term opportunity for the special servicers outweighs the near term volatility that may occur. Each of these names will likely participate in the secular shift away from the traditional servicing model, because there is still a massive backlog of distressed mortgages that need to be cleared, Basel III will limit banks ability to justify keeping large servicing portfolios, and regulatory compliance has become costly and creates operational risk.-- Source: Provided by Briefing (www.briefing.com)

So there you go... What's interesting about the vol is that this 59% (ish) level is in fact not just an annual high, but a two year high (at least two years).

Let's turn to the Skew Tab.

We can see that Oct is depressed to Nov -- that's a reflection of the next earnings report which is due out in late Oct (but after Oct expo). The back two months do show a rather flattish skew, which in terms of the broader market isn't "normal." The option market does not reflect greater downside risk than upside potential -- an interesting phenomenon to note given the rise in equity price and vol.

You can read about skew and why it exists here: Understanding Option Skew -- What it is and Why it Exists.

Finally, let's turn to the Options Tab.

Across the top we can see the monthly vols are priced to 53.16% and 70.80% for Oct and Nov, respectively. Note that as we move closer to Oct expo, two things will likely happen.

1. IV30™ will likely rise as the weighted average turns to focus on Nov (and earnings).
2. Nov vol will rise as the "non-earnings" days go away and the expiry turns more into a more concentrated earnings event.

In English, this multi-year high in the implied is likely to rise -- and rather significantly.

Disclosure: This is trade analysis, not a recommendation.