Friday, November 12, 2010

Humana (HUM) - Calendar Spread in Play on Elevated Vol

HUM is trading $59.60, down 0.6% with IV30™ unched. The LIVEVOL™ Pro Summary is below.


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The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 and <=70
Sigma1, Sigma2 >= 1

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

It's also available on the Scanner Tab, in the "Trading Opportunities" folder. I've included that snap as well (below).

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. 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 front month vol simply because earnings are approaching.

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

We can see how the front month is elevated to the back (which is normal this close to expo). Note the downside skew as well - big ole' vol difference.

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

What I'm interested in here is the vol portion. Check out how high IV30™ is relative to the short-term historical vol (HV20™) and the long-term historical vol (HV180™). Specifically:

IV30™: 30
HV20™: 22
HV180: 25

This stock can gap, but a vol sale over 35 (ish) seems like a possible do.

Finally, let's look to the Options Tab (below).

Potential Trades to Analyze
1. Do the Nov 60/Dec 60 straddle time spread (sell Nov/buy Dec). It looks like that will cost ~ $2.00 (maybe more like $2.10). This trade sells ~36 vol and buys ~31 vol (adjusted for actual execution prices).

2. Move down that skew chart to do your calendar. Do the Nov 55/Dec 55 put spread (sell Nov/ buy Dec). That looks like it will cost ~$0.60. It purchases ~34 vol and sells ~44 vol (adjusted for prices). The key here would be selling the Nov 55 puts @ $0.20. If you can do that, this trade looks more snazzy.

This is trade analysis, not a recommendation.

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