Wednesday, October 20, 2010

Energy XXI (EXXI) - Elevated Vol Starts to Drop

EXXI is trading $23.34, up 2.2%, with IV30™ down 5.9%. The LIVEVOL™ Pro Summary is below.


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EXXI is an independent oil and natural gas exploration and production company with operations focused in the United States Gulf Coast and the Gulf of Mexico.

Earlier I posted a stock with relatively depressed vol, I found EXXI using a real-time custom scan that hunts for high vols.

Custom Scan Details
Stock Price >=$7 <= $70
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 EXXI 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). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can see:
IV30™: 69.68
HV20™: 46.25
HV180™: 53

So, IV30™ is elevated relative to the short term and long term realized movement of the stock. We can also see that IV30™ was as high as 87 just a few days ago...

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

Possible Trades to Analyze
1. Sell a Nov 22.5/25 strangle @ $2.60 or 69 (ish) vol. This requires EXXI to be in ($19.90, $27.60) on Nov expo to be a winner. Of course, this can be a winner if vol comes in before expo with the stock within that range as well. The 52 wk range is [$12.68, $26.80].  Note, this is naked options on both sides.

2. Given that wide of a stock range, a 20/25 strangle sale @ $1.80 may be another trade to analyze. This gives safety down to $18.20 on the downside, though does collect less premium and yields a slightly higher risk to the upside (less premium to cover). Note, this is also naked options on both sides.

3. Selling the meat and covering on both sides can also be a nice little play here. Sell either of the strangles above and then buy the strangle one line OTM.

On extra word of caution here, the vol is already down a lot, so we don't want to chase a trade.

This is trade analysis, not a recommendation.

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