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ERTS has some very interesting volatility term structure -- this was a fun one to write.
I found this stock using a custom scan I built searching for names where IV30™ is up at least 10% today. The scan details are below with a snapshot if you want to build it yourself in Livevol Pro.
Custom Scan Details
Stock Price >= 10
Average Option Volume >= 1,200
Days After Earnings >= 5 and <= 60
IV30™ Percent Change >= 10%
IV30™ >= 10
The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.
The ERTS Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).
IV30™: 42.11
HV20™: 57.29
HV180™: 34.81
We can see the IV30™ rose into earnings (as expected) then fell as the stock popped on the news. The stock then sort of stood still for a while and has decided to pop again on what I believe was some color from management on new products and forecasts. Today, the IV30™ has risen above the HV180™ (long-term realized). The HV20™ (short-term realized) is artificially high because of that big move a few days ago on the earnings release.
The Skew Tab snap (below) illustrates the vols by strike by month.
We can see the front month is super elevated to the back, but we can also see that the second month is substantially elevated to the third. Since it's hard to really see the second and third month vol difference with the front month in there (messing up the scale), I've included the skew tab with just Mar (2nd month) and Jun (third month), below.
It's easier to see the Mar/Jun vol difference now. This is important because Jun has an earnings cycle (May) while Mar does not. Hmmm... Finally, let's look to the Options Tab.
Possible Trades to Analyze
1. Calendar spread Feb and Mar:
a. Upside Spread:
Buy the Feb/Mar 20 call spread for $0.53 (sell ~68 vol and purchase ~43 vol). This is a bet that ERTS sticks around $20 on expo.
b. Downside Spread:
Buy the Feb/Mar 19 put spread for $0.49 (sell ~67 vol and purchase ~41 vol). This is a bet that ERTS sticks around $19 on expo.
With both of these trades, on expo an extension could be to sell the next strike OTM in Mar to leg into a cheap call (or put) spread.
2. Calendar Spread Mar and Jun:
This is tricky because an earnings cycle will be in the Jun options but not the Mar options. Given how much ERTS moved last cycle, that seems like a pretty neat bet.
a. Buy the Mar/Jun 21 call spread for $0.54 (~8 point vol scalp) and own earnings vol for less than non-earnings vol.
b. Buy the Mar/Jun 18 put spread for $0.61 (~4 point vol scalp) and own earnings vol for less than non-earnings vol.
3. Alternatives:
Any combination of same strike and diagonal strike spreads seem reasonable in order to own back month vol for less than the front -- in particular owning earnings.
Something more fancy could be to open a Feb/Jun calendar. If that works out over the next 2.5 days, then spread Jun with Mar options. This yields two sales higher than the Jun purchase while owning earnings in a stock that has a history of moving on that news.
This is trade analysis, not a recommendation.
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