Tuesday, November 16, 2010

Ford (F) - Vol Rising to Elevated Levels

F is trading $16.66, down 2.0% with IV30™ up 3.9%. The LIVEVOL™ Pro Summary is below.


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I found this stock using a real-time custom scan. This one hunts for high vols.

Custom Scan Details
Stock Price >= $7 and <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 and <=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 F 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™: ~48.87
HV20™: 36.60
HV180™: 38.93

So, IV30™ is elevated relative to the short term and long term realized movement of the stock.

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

Possible Trades to Analyze
1. Start risky: Sell the F Dec 16/17 strangle @ $1.42. That's ~48 vol.

2. Take some risk off: Do #1, but purchase either a Dec 15 put or a Dec 18 call. Either way, that long option leaves the position essentially no risk to that side since the credit is ~ $1.00 and the strikes are just $1.00 wide.

3. For you margin weary guys, a purchase of the Dec 15/18 strangle for $0.78 against the 16/17 strangle sale yields a net credit of $0.64 (MaxGain) and a MaxLoss of $0.36. So a 1.78:1 ratio selling elevated vol. I've included the PnL chart for this trade at Dec expo.

This trade requires F to be in the range ($15.40, $17.60) on Dec. expo. Quick log normal rounding analysis demonstrates that the vol you "think" the stock will move at is the key.

If we take vol to be the Dec 17 level (~48), then this trade has a ~44% chance of winning (using a long list of assumptions). But, if we take the vol to be the HV180™ (38.93), then the probability of profit rises to 53.5%.

The point here is not to use these numbers, but rather to demonstrate what it actually means to sell vol. i.e. what the implication is of a vol bet.  That 10 point vol difference in expectation changes the outlook of the trade fairly dramatically.  In English, selling vol means you believe it will go down.

NB: GM IPO is coming soon.

This is trade analysis, not a recommendation.

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