Foster Wheeler (FWLT) - Low Vol on Moving Stock

FWLT is trading $32.94, down 0.8% with IV30™ up 1.2%. The LIVEVOL™ Pro Summary is below.



I wrote a note on this stock on 9-28-2010 with the stock trading $24.67. Click the title to read that post (below):
Foster Wheeler (FWLT) - Oct Call Buyers on Promising News; Buyout Rumors Surface

Today, 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 FWLT 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™: ~37.57
HV20™: 45.00
HV180™: 46.37

So, IV30™ is depressed relative to the short term and long term realized movement of the stock. The HV is elevated because the stock has been rising rather abruptly. We can see a gap up on earnings and then a more recent rise. On 11-3-2010 the stock was trading $23.73, it's up ~39% since then.

The Skew Tab (below) illustrates the vols by month. I've only included the front two months.



A normal looking skew to the downside, but an elevated vol to the upside in both Dec and Jan.

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



Possible Trades to Analyze
1. Buy the Jan 33 straddle for $3.35 or ~38 vol.

2. More aggressive, buy the Dec 33 straddle for $1.43 or ~ 38 vol.

3. Do #1 but sell something.
Sell the Jan 30 puts @ $0.62 (~40 vol). This cuts the total debit to $2.73, but also severely limits the profit potential to the downside.

4. A little riskier: Do #3 and sell two Jan 30 puts.
The debit now becomes $2.11, but the position is now naked downside below $30.

5. A contrarian trade:
Sell the Dec 33 straddle @ $1.37.
Buy the Dec 32/43 strangle for $$0.64.
This yields a net credit of $0.73 (MaxGain) with a MaxLoss of $0.27 or a 2.7:1 ratio. The PnL range for this one is very small, though.

6. Try #5 but buy the Dec 31/35 strangle for $0.27. This creates a $1.10 credit (MaxGain), with MaxLoss of $0.90.

Note that #5 and #6 both sell depressed vol.

This is trade analysis, not a recommendation.

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