Friday, September 24, 2010

Mead Johnson (MJN) - Scalping Vol on Earnings Date Bet

MJN is trading $57.33, up 2.4% with IV30™ up 9.7%. The LIVEVOL™ Pro Summary is below.

I found this company using the high vol real-time custom scan I created.  You can read about the details here: High Vol Custom Scannning and Trades.

Let's look at the Charts Tab. 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 that IV30™ (36) is well elevated to HV20™ (22) and HV180™ (27). Or, in English, the 30 day implied is elevated to the realized movement of the stock over the last 20 trading days and the longer term realized movement of the stock over the last 180 trading days.

Another interesting complication here is earnings. The last earnings cycle was 7-29-2010. We're projecting earnings after the Oct expiration (10-15-2010). More on that in a sec...

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

The shape of skew isn't the focus, but rather that the 55/60 strikes are actually higher vol in Oct than Nov. If Nov has earnings, that seems like a potential opportunity to trade. Let's look to the Options Tab (click to enlarge)

Possible Trades to Analyze
1) Straight Vol Sale: To bet that the vol is too high and that earnings are after Oct expo. an Oct 55/60 strangle sale @ ~ $2.00 on ~36 vol is a reasonable bet. This trade bets that the implied really is elevated and makes money at expo if MJN stock is in ($53, $62).

2) A bit less risky is selling that strangle in Oct and buying the strangle in Nov for a net debit of ~$2.25. This bets that MJN back month vol elevates to earnings and the stock stays put before then. Selling the Nov. strangle before earnings hoping for a nice scalp is a reasonable approach as well.

This is trade analysis, not a recommendation.

Legal Stuff: