Smithfield (SFD) - Calendar Spread Opportunity

SFD is trading $16.48, down 0.7% with IV30™ also down 1.8%. The LIVEVOL™ Pro Summary is below.



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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.

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

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.



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 (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line). I've highlighted the ATM strikes.



Now we can turn to the Charts Tab (below). 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 see that IV30™ is trading above both the short-term realized vol (HV20™ is 28) and the longer-term realized (HV180™ is 37).

Finally, let's look to the Options Tab (below).



We can see that Oct vol is ~46 while Nov is ~37. This is the vol diff we're lookin' at.

Potential Trades to Analyze
1. Sell the Oct 16/17.5 strangle @0.35 or ~44.5 vol. Buy the Nov 16/17 strangle for $1.25 or ~40.5 vol. The total debit is $0.90. Note the "uneven" upside strikes allowing for a bit more upside room in Oct. The hope here is that SFD stays within [$16, $17] by Oct expo.

2. Do trade #1, if it works out well, then sell the Nov 15/18 strangle if possible at or above $0.45. That leaves a total debit of $0.45 for a max gain of $0.55 or a 1.22:1 MaxGain:MaxLoss ratio.

3. Other trades include selling more than 1:1 in Oct and Nov. Also, instead of buying the strangle in Nov, we can look at the 16 or 17 straddle for a slight delta bet along with the vol.

This is trade analysis, not a recommendation.

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