Tuesday, December 21, 2010

Limited Brands (LTD) - Depressed Vol

LTD is trading $31.28, up 0.6% with IV30™ down 2.5%. The LIVEVOL™ Pro Summary is below.

LTD is a specialty retailer of women’s intimate and other apparel, beauty and personal care products and accessories under various trade names.

I found this stock using a real-time custom scan. This one hunts for low vols.

Custom Scan Details
Stock Price >= $7
IV30™ - HV20™ <= -8 >= -40
HV180™ - IV30™ >=7
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >= 32

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 short-term implied vol (IV30™) that is depressed 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 purchasing depressed IV30™ relative to HV20™ simply because of a large earnings move.

The LTD 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).

We can see:
IV30™: 26.46
HV20™: 38.64
HV180™: 36.85

So, IV30™ is depressed relative to the short term and long term realized movement of the stock. One note, the HV20™ is actually elevated b/c of a large dividend, the actual (or more appropriate) HV20™ is more like ~30.5. I've drawn in that HV20™ line in white for a better visual demonstration. Either way, the IV30™ feels lowish.

Let's look to the Skew Tab (below).

I've highlighted the Jan ATM straddle. We can see it's depressed to Feb as well.

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

Possible Trades to Analyze
1. Start simple, buy vol:
Buy the Jan 31 straddle for $2.00 (~27 vol).

2. A little bullish twist, buy vol:
Buy the Jan 30/31 strangle for $1.70 (~28 vol).
Sell 2 of the Jan 29 puts @ $0.25 (~29 vol).
This is naked short the downside but reduces the debit to $1.20. Note that makes the downside MaxGain just $0.80.

3. Make a small bullish bet with low probability but high payout:
Do the Jan 31/32/33 butterfly and pay $0.20. This is contrarian to the low vol purchases. This trade bets that LTD will pin at (or around) $32 on Jan expo. The MaxGain is $0.80 with MaxLoss $0.20 (or 4:1). The odds of this paying out are low, but it is a bet that the low vol is "justified." Other interesting butterflies also exist.

This is trade analysis, not a recommendation.

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