NETL - Custom Scan and Finding Low Vol to Purchase

Discussion in 'Options' started by livevol_ophir, Sep 17, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    NETL is trading $25.54, down 0.5% with IV30&#8482 down 4.6%.

    <img src="">

    This is the third (and final) of a series on custom scans and identifying trading opportunities. You can read either of the first two here:

    9-15-2010: <b><a href="">Time Spread Custom Scan</a></b>
    9-16-2010: <b><a href="">Elevated Vol Custom Scan</a></b>

    With the market going up and the VIX going down, I am starting to look for opportunities to buy options (gasp!). I created a third custom scan, this one looking for back spread (purchase) opportunities. A snapshot of the custom scan is included (<a href="">in the article</a>).

    <b>Custom Scan Details</b>
    Stock Price >= $10
    IV30&#8482 >= 1
    Industry != Bio-tech
    Average Option Volume >= 1000
    IV30&#8482 - HV20&#8482 <= -10 >= -75
    Days After Earnings >= 29

    So, non-bio tech stocks that are more than $10, with HV20&#8482 at least 10 points higher than IV30&#8482 which are not affected by earnings.

    I found NETL. We will look at four charts to analyze the vol situation. First, let's look at the broader view. A one year vol chart of IV30&#8482 (red), HV20&#8482 (blue) and HV180&#8482 (pink) (<a href="">in the article</a>).

    We can see that the red line is below both the blue line and the pink line. In English, the Oct options are trading lower than the stock has moved over the last 20 trading days and the longer measure of the last 180 trading days.

    IV30&#8482: 37.98
    HV20&#8482: 48.17
    HV180&#8482: 50

    Let's now look at each vol by itself. First, the HV180&#8482 over the last year (<a href="">in the article</a>).

    A very cool chart, we can see long term trends in HV180&#8482 for NETL. It collapsed from Sep09 to Jan10 where it fell to 37, then went straight up to its current level of 50.

    Next, we'll look at the one year chart of HV20&#8482 (<a href="">in the article</a>).

    We can see a strong cyclical move in the short term realized vol around earnings. This might actually be a good stock to buy earnings vol in given that abrupt pattern. While it peaked from last earnings, it has fallen to a more steady state of 48.

    Finally, the one year chart for the IV30&#8482 (<a href="">in the article</a>).

    <img src="">

    The IV30&#8482 also has a cyclical pattern with earnings, which is to be expected - rise into earnings, collapse out of earnings. More interesting however is that the IV30&#8482 today has dipped below it's longer term support. I have drawn in a yellow line to clearly illustrate this "breach."

    In all, we see a low IV30&#8482, falling below a support level today, with the short term and long term realized well above it. We note that HV180&#8482 started dropping pretty significantly right around now, last year.

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

    <img src="">

    <b>Possible Trades to Analyze</b>
    A purchase of the 25 straddle, 26 straddle or 25/26 strangle is all around 38 vol. Looking to the 26 straddle, a $2.25 purchase requires NETL to be outside of the range [$23.75, $28.25] by Oct expo. Alternatively, a vol increase before then also makes this trade a winner. The 52 wk range for NETL is [$18.43, $35.00].

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, charts here:

    Legal Stuff:
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  2. froluis


    Why do you exclude Biotech from the skan?
  3. livevol_ophir

    livevol_ophir ET Sponsor

    Bio-tech vol is a special case. It can be incredibly low for the quiet periods before PDUFA and of course, the opposite at other times. I have a special bio-tech scan when I'm just lookin' for those type of stocks.
  4. froluis


    OK thanks for your answer.