Tuesday, November 23, 2010

Hallibuton (HAL) - Depressed Vol Starts to Rise

HAL is trading $36.35, down 2.6% with IV30™ up 4.5%. The LIVEVOL™ Pro Summary is below.

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

Custom Scan Details
Stock Price >= $7
IV30™ >= 1
IV30™ - HV20™ <= -8 >= -40
HV180™ - IV30™ >= 7
Average Option Volume >= 1,200
Days After Earnings >= 32
Industry != Bio-tech

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.

The goal with this scan is to identify short-term implied vol (IV30™) that is depressed 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 purchasing depressed IV30™ relative to HV20™ simply because of a large earnings move.

The HAL 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).

We can see:
IV30™: 38.04
HV20™: 51.51
HV180™: 46.51

So, IV30™ is depressed relative to the short term and long term realized movement of the stock. We can glance at the Skew Tab below. I've only included Dec.

So, a normal looking skew. Finally, let's look to the Options Tab (below).

Possible Trades to Analyze
Ok, this is really hard for me because I hate buying premium, but here goes.

1. Buy the Dec 36 straddle for $2.88. This purchases ~ 38.5 vol. Keep in mind though, buying Dec vol buys a Thanksgiving break and a relatively slower period in the market. So, buyer beware.

2. Do #1, but sell some of that elevated vol to the downside per the skew chart. Maybe Sell 2 Dec 33 puts @ $0.40 to bring the net debit down to $2.08. The Dec 33 puts are priced at ~ 42.5 vol. One note here, this leaves a pretty small max gain to the downside...

3. Ok, here's a crazy idea. Do the complete opposite. Sell the Dec 36 straddle @ $2.83 and purchase the Dec 35/37 strangle for $1.99. This yields a net debit of $0.84 (MaxGain) with a MaxLoss of $0.16 for 5:1 (ish). Of course, the PnL window is extremely tight. On expo HAL would have to be in ($35.16, $36.84). Someone check that math...

4. A final idea here is to wait for Thanksgiving to come and go and see if any of these trades make better sense next Monday.

This is trade analysis, not a recommendation.

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