Thursday, September 16, 2010

Hologic (HOLX) - Elevated Vol Custom Scan Trade

HOLX is trading $16.53, up 1.2% with IV30™ down 2.3%. The LIVEVOL™ Pro Summary is below.

Back by popular demand, I found this stock using another real-time custom scan. This one hunts for high vols. Click to read the Time Spread Custom Scan. The custom details pic for this vol scan is included (click to enlarge).

Custom Scan Details
Stock Price >=5
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >= 10 <= 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated 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 selling elevated IV30™ simply because earnings are approaching.

The HOLX Charts Tab is included (click to enlarge). 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 IV30™ is ~54 vs HV20™ of 34. Also, the long term trend of realized vol, HV180™, is just 37, so vol is elevated. You can actually find a bunch of stocks with short term implied that's elevated relative to short term realized as the market has been in a steady upswing and we're going into Oct, which can be "jittery" to say the least. I like HOLX in particular because the long term HV is also quite low.

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month.

We can see here that the skew is normal, rather pretty really. So this is a vol play on the ATM, not so much a scalp on skew. Finally, let's look to the Options Tab.

We can see that the Oct 16 straddle is priced at about 53.5 vol, while Oct 17 straddle is more like 52.5 vol.

Possible Trades to Analyze
The riskiest trade would be a naked straddle sale. In this new found world of takeovers, I think a touch more prudence may be appropriate. An Oct 16 straddle sale @ $2.10 with either an Oct 17 or Oct 18 call purchase protects the upside. By selling the Oct 16 straddle rather than the 17, the trade sells higher vol, but more importantly, this trade also gives ~$0.50 more room to a naked downside.

The Oct 16 straddle sale with the 17 call purchase nets a $1.30 credit, so the trade wins to the upside at all prices. It does however leave a naked downside and loses below $14.70 at expo. HOLX 52 wk range is [$13.22, $19.72].

This is trade analysis, not a recommendation.

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