HAL - Depressed Vol Starts to Rise

Discussion in 'Options' started by livevol_ophir, Nov 23, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    HAL is trading $36.35, down 2.6% with IV30™ up 4.5%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/11/hal.html">in the article</a>.

    <img src="http://www.livevolpro.com/help/images/blog/hal_summary.gif" />

    I found this stock using a real-time custom scan. This one hunts for low vols.

    <b>Custom Scan Details</b>
    Stock Price &gt;= $7
    IV30™ &gt;= 1
    IV30™ - HV20™ &lt;= -8 &gt;= -40
    HV180™ - IV30™ &gt;=&nbsp;7
    Average Option Volume &gt;= 1,200
    Days After Earnings &gt;= 32
    Industry != Bio-tech

    The snapshot of the scan is included (<a href="http://livevol.blogspot.com/2010/11/hal.html">in the article</a>) in case you want to build it yourself in Livevol Pro™.

    <img src="http://www.livevolpro.com/help/images/blog/low_vol_scan.gif" width="600" />

    The goal with this scan is to identify short-term implied vol (IV30™) that is depressed both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not purchasing depressed IV30™ relative to HV20™ simply because of a large earnings move.

    The HAL Charts Tab is included (<a href="http://livevol.blogspot.com/2010/11/hal.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

    <img src="http://www.livevolpro.com/help/images/blog/hal_charts.gif" width="600" />

    We can see:
    IV30™: 38.04
    HV20™: 51.51
    HV180™: 46.51

    So, IV30™ is depressed relative to the short term and long term realized movement of the stock. We can glance at the Skew Tab <a href="http://livevol.blogspot.com/2010/11/hal.html">in the article</a>. I've only included Dec.

    So, a normal looking skew. Finally, let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/11/hal.html">in the article</a>).

    <b>Possible Trades to Analyze</b>
    Ok, this is really hard for me because I hate buying premium, but here goes.

    1. Buy the Dec 36 straddle for $2.88. This purchases ~ 38.5 vol. Keep in mind though, buying Dec vol buys a Thanksgiving break and a relatively slower period in the market. So, buyer beware.

    2. Do #1, but sell some of that elevated vol to the downside per the skew chart. Maybe Sell 2 Dec 33 puts @ $0.40 to bring the net debit down to $2.08. The Dec 33 puts are priced at ~ 42.5 vol. One note here, this leaves a pretty small max gain to the downside...

    3. Ok, here's a crazy idea. Do the complete opposite. Sell the Dec 36 straddle @ $2.83 and purchase the Dec 35/37 strangle for $1.99. This yields a net debit of $0.84 (MaxGain) with a MaxLoss of $0.16 for 5:1 (ish). Of course, the PnL window is extremely tight. On expo HAL would have to be in ($35.16, $36.84). Someone check that math...

    4. A final idea here is to wait for Thanksgiving to come and go and see if any of these trades make better sense next Monday.

    This is trade analysis, not a recommendation.

    <b>Follow Live Trades and Order Flow on Twitter: @Livevol_Pro</b>

    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/11/hal.html">http://livevol.blogspot.com/2010/11/hal.html</a>

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