Wednesday, September 15, 2010

BJ's Wholesale (BJ) - Time Spreading on Vol Differences and Custom Scans

BJ is trading $42.32. The LIVEVOL™ Pro Summary is below.


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I found this stock using a custom scan I built in Livevol Pro. I've included a snapshot.

Time Spread Scan Details
Stock Price >= $5
Avg. Option Volume >= 1500
Industry != Bio-Tech
Sigma2 - Sigma3 >= 7
Sigma2 >= 1
Sigma3 >= 1
Days After Earnings <= 10 >= 70

The Sigma2/3 >=1 is just a sanity check so I don't get any weird bond funds with 0.5 vol or whatever. The days after earnings makes it so I can eliminate some earnings vols from the front month, as I am looking for natural time spreads, not earnings plays (I have a separate scan for earnings).

I have included the Skew Tab (click to enlarge). This illustrates pretty clearly the vol diff from Oct to Dec. I've highlighted the 40/45 strangle.

Moving to the Options Tab I can see the actual prices and possible trade.

Possible Trade to Analyze
Sell the Oct 40/45 strangle @ $1.70
Buy the Dec 40/45 strangle for $3.35
Net debit is $1.65.

The Oct strangle sells 39 vol (ish) and the Dec strangle purchases 32 vol (ish). The trick here is that earnings look like they will occur after Oct 15th (expo). I see projections from Oct 18th out to Nov 17th. If this is true, this trade buys low vol with an earnings date and sells high vol without. Could be a neat trick.

This trade loses to large moves away from the long strikes in Oct, or an absolute vol disintegration as it is long vega. So a takeover would be bad. It wins to time decay and vol increases with the stock sitting.

This is trade analysis, not a recommendation.

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