I mentioned this stock a few times in the last month. You can read the prior posts here:
UPDATE: Hertz (HTZ) - Jan Call Interest, Spiking Vol, Stock Near Annual Low
Hertz (HTZ) - Risk Reversal Trades in Jan on Stock Yearly Low
Today I see a possible trade given the exploding vol in Oct and earnings in Nov. It appears on the elevated vol scan.
Custom Scan Details
Stock Price >=5
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >= 10 <= 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.
Let's look to the Skew Tab (click to enlarge).
We can see that Oct (red) is well above Nov (yellow). The last earnings cycle for HTZ was 8-3-2010. Since Oct expo is 10-15-2010, it's a reasonable bet that earnings will be after Oct. and in Nov. Hmmm...
The last earnings cycle had HTZ front month ATM straddle vol at 76 on it's peak right before earnings. The Livevol Pro Earnings & Dividends Tab, an isolated snap, is included (click to enlarge). Red is the front month vol, blue the back.
Let's turn to the Charts tab, now, 6 month vol chart (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.
We can clearly see where I've highlighted the IV30™ explosion today. As of this writing, IV30™ is 65 against HV20™ of 51 and HV180™ of 54. In other words, short term implied is substantially above short term realized and long term realized. This feels like a vol sale... But...
Let's finally turn to the Options Tab (click to enlarge).
Note the vol difference between Oct and Nov. While Oct IV is 71, Nov IV is just 61. That's a 10 point vol diff while earnings (a vol event) are likely in Nov.
Possible Trades to Analyze
1. Sell the elevated Oct vol in the Oct 11 straddle @ $1.35 or 71 vol. Buy the depressed Nov 11 straddle for $2.15 or 62 vol for a net debit of $0.80 while gaining the benefit of the earnings vol. If HTZ sits here, and Nov vol goes from 62 to 76 (last earnings IV level), this could be a nice vol scalp selling out right before earnings.
2. Other possibilities are naked selling of Oct, "hoping" for steady stock behavior, then rolling that premium win into a purchase of Nov if it's still depressed and talking an earnings vol ride (or just take the premium win). Given the takeover happy world right now, I am more hesitant than I've been for a long time to be naked any upside. An Oct 11 straddle with a 12 strike call purchase could be wise if not doing the entire time spread.
Keep in mind, calendar spreads lose to takeovers if you're long the back (vega).
This is trade analysis, not a recommendation.
Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html
The stock is down more than 10%. Lesson learned: when there is such big IV difference, there must be a reason for this.
ReplyDeleteI see the Oct 11 straddle can be purchased for $1.20
ReplyDeleteNov 11 straddle can be sold @ $1.80.
So a $0.60 credit on what would have been an $0.80 purchase. A $0.20 loser as of right now. I still liked the bet, though a loss is obviously not the goal.