HUM - Calendar Spread in Play on Elevated Vol

Discussion in 'Options' started by livevol_ophir, Nov 12, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    HUM is trading $59.60, down 0.6% with IV30™ unched. The <a href="">LIVEVOL™ Pro Summary</a> is <a href="">in the article</a>.

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    <a href=""><img height="200" src="" /></a>

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    The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

    <b>Custom Scan Details</b>
    Stock Price &gt;= $5
    Sigma1 - Sigma2 &gt;= 8
    Average Option Volume &gt;= 1,000
    Industry != Bio-tech
    Days After Earnings &gt;=5 and &lt;=70
    Sigma1, Sigma2 &gt;= 1

    The snapshot of the scan is included (<a href="">in the article</a>) in case you want to build it yourself in Livevol Pro™.

    <img src="" width="600" />

    It's also available on the Scanner Tab, in the "Trading Opportunities" folder. I've included that snap as well (<a href="">in the article</a>).

    The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. 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 selling elevated front month vol simply because earnings are approaching.

    Looking to the Skew Tab (<a href="">in the article</a>), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

    We can see how the front month is elevated to the back (which is normal this close to expo). Note the downside skew as well - big ole' vol difference.

    Now we can turn to the Charts Tab (<a href="">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="" width="600" />

    What I'm interested in here is the vol portion. Check out how high IV30™ is relative to the short-term historical vol (HV20™) and the long-term historical vol (HV180™). Specifically:

    IV30™: 30
    HV20™: 22
    HV180: 25

    This stock can gap, but a vol sale over 35 (ish) seems like a possible do.

    Finally, let's look to the Options Tab (<a href="">in the article</a>).

    <b>Potential Trades to Analyze</b>
    1. Do the Nov 60/Dec 60 straddle time spread (sell Nov/buy Dec). It looks like that will cost ~ $2.00 (maybe more like $2.10). This trade sells ~36 vol and buys ~31 vol (adjusted for actual execution prices).

    2. Move down that skew chart to do your calendar. Do the Nov 55/Dec 55 put spread (sell Nov/ buy Dec). That looks like it will cost ~$0.60. It purchases ~34 vol and sells ~44 vol (adjusted for prices). The key here would be selling the Nov 55 puts @ $0.20. If you can do that, this trade looks more snazzy.

    This is trade analysis, not a recommendation.

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    Details, trades, prices, vols, skews, charts here:
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