HPQ - Vol Rising

Discussion in 'Options' started by livevol_ophir, Nov 29, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    HPQ is trading $42.22, down 2.3% with IV30™ up 11.3%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/11/hpq.html">in the article</a>.

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

    I found this stock using a custom scan I built searching for names where IV30™ is up at least 10% today. The scan details are (<a href="http://livevol.blogspot.com/2010/11/hpq.html">in the article</a>) with a snapshot if you want to build it yourself in Livevol Pro.

    <b>Custom Scan Details</b>
    Stock Price &gt;= 10
    Average Option Volume &gt;= 1,200
    Days After Earnings &gt;= 5 and &lt;= 60
    IV30™ Percent Change &gt;= 10%
    IV30™ &gt;= 10

    The goal here is to find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

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

    The HPQ Charts Tab is included (<a href="http://livevol.blogspot.com/2010/11/hpq.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/hpq_charts.gif" width="600" />

    IV30™: 27.31
    HV20™: 24.69
    IV180™: 27.84

    We can see the IV30™ rose into earnings (as expected) then fell. Today it's pointing back up and is almost as high as the HV180™ (long-term realized) and is a few points passed the HV20™ (short-term realized).

    The Skew Tab snap (<a href="http://livevol.blogspot.com/2010/11/hpq.html">in the article</a>) illustrates the vols by strike by month.

    The skew looks pretty normal, though the upside does bend up a bit. Finally, let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/11/hpq.html">in the article</a>).

    <b>Possible Trades to Analyze</b>
    1. Sell the Dec 42 straddle if you want sell naked vol. It looks like the straddle can be sold @ ~$2.11. I'm not in love with this trade. I'd rather sell 30+ vol in HPQ.

    2. Do trade #1, but purchase the 41/43 strangle for $1.28. This is a fancy little bet that risks $0.17 to make $0.83, but has a small probability of success. I've included the PnL chart for this trade <a href="http://livevol.blogspot.com/2010/11/hpq.html">in the article</a>.

    Assuming a log-normal distribution of stock returns, back of the envelope calcs yields ~ 10% probability that the stock is in the range ($42.17,$42.83), which is the range necessary on Dec expo for the trade to be a winner. In other words, if the stock moves at the current vol, this doesn't look real good.

    3. The markets are nice and tight on this stock, selling the downside seems reasonable since those vols are in the 31+ range.

    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/hpq.html">http://livevol.blogspot.com/2010/11/hpq.html</a>

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  2. rosy2


    what are the numbers if you assume a more realistic distribution
  3. livevol_ophir

    livevol_ophir ET Sponsor

    I haven't looked, but out of curiosity, what distribution do you use?
  4. rosy2


    can you plug in cauchy instead
  5. spindr0


    I am so totally missing this. And I have no clue what calcs go into HV 30, 180, etc. so it may be my ignorance of your system that prevents me from seeing this.

    In looking at today's closing chains, the skew is in the outlier strikes where averaging the B/A to get the IV can make the IV look more radical. OK, despite that, there's skew up/down there, compared to Jan (that was obvious from your skrew chart as well). But there's no skew ATM.

    Given that, you suggest that one could sell the Dec ATM straddle (which has no skew) but you're not in love with it ("I'd rather sell 30+ vol in HPQ"). Then you proceed to build other possible trades off of this one. To me, it's all a non starter.

    Do you track the performance of any of these trades or are you taking these trades IRL (which can be followed somewhere)? Are are you just thowing these out here as "analysis"?
  6. livevol_ophir

    livevol_ophir ET Sponsor

    I'm walking through the type of analysis we do on the floor. I don't like the frist few trades, b/c of the vol level. I think that was failry clear, if not, I apologize.