WLP - Examining Health Insurer Elevated Vol

Discussion in 'Options' started by livevol_ophir, Nov 19, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    WLP is trading at $57.34, up 1.8% with IV30™ up 11.0%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/11/wlp.html">in the article</a>.

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    I found this stock using a real-time custom scan. This one hunts for high vols. Note that HUM reported earnings yesterday (or whatever) and it wasn't good. A quick snip from a news story below:

    HUM projected sharply lower profit next year as it expects more Americans to return to the doctor's office and sees lower margins in its Medicare plans.

    Humana's outlook was the first detailed view of 2011 from the major U.S. health insurers, whose results have consistently topped expectations this year, and includes a projected impact on implementing a new U.S. healthcare law.
    (Source: <b><a href="http://www.reuters.com/article/idUSTRE6AH3PQ20101118?feedType=RSS&amp;feedName=globalMarketsNews&amp;rpc=43">Reuters</a></b>)

    <b>Custom Scan Details</b>
    Stock Price &gt;= $7 and &lt;= $70
    IV30™ - HV20™ &gt;= 10
    HV180™ - IV30™ &lt;= -8
    Average Option Volume &gt;= 1,200
    Industry != Bio-tech
    Days After Earnings &gt;=10 and &lt;=60

    The goal with this scan is to identify short-term implied vol (IV30™) that is elevated 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 selling elevated IV30™ simply because earnings are approaching.

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

    We can see:
    IV30™: ~36.78
    HV20™: 22.90
    HV180™: 28.66

    So, IV30™ is elevated relative to the short term and long term realized movement of the stock. We can also the stock has moved from ~$48 in early Sep to now over $57.

    Let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/11/wlp.html">in the article</a>).

    <b>Possible Trades to Analyze</b>
    1. Sell the Dec ATM (57.5) straddle @ $4.70 (ish). This yields a profit on Dec expo if WLP is in ($52.80, $62.20). Of course, this can be shut down early for a win if the stock sticks around here and vol drops, or it just wins to time decay.

    2. Do #1 above, but cover with a strangle; like the Dec 55/60 for $2.60. That yields a $2.10 credit (MaxGain) with a MaxLoss of $2.90. It wins on Dec expo if WLP is in ($55.40, $59.60). I mean that seems decent...

    3. If it's the downside that seems the riskiest, selling the 57.5 straddle @ $4.70 and purchasing the Dec 55 puts for $1.30 yields a $3.40 credit and wins to all stock prices below 57.5 (even a total collapse) and is safe to the upside up to $60.90. Above that level, it's naked short options.

    This is trade analysis, not a recommendation.

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

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