Tuesday, November 9, 2010

Lender Processing (LPS) - Elevated Vol; Two Week Trade

LPS is trading $30.75, with IV30™ down 4.0%. 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 LPS 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™: ~48.03
HV20™: 37.48
HV180™: 33.06

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).

Unfortunately there isn't a lot of liquidity here - the markets are wide, though OI is large enough that there is some trading. The company averages 1,291 contracts traded a day, so just above my filter.

Possible Trades to Analyze
1. Sell the ATM straddle @ $2.00 naked, very risky.

2. Do #1 above, but buy the Nov 25/35 strangle for $0.35, yielding a net credit of $1.65.

3. Go one sided, sell just a call or a put.

4. Do #3, but cover it up with the OTM option (so sell a call spread or sell a put spread.)

One note here, I think if you like this vol to sell, don't reach for the prices. If you can't get a reasonable fill, skip the trade in my opinion. 

And a final note, check out the stock movement as it dipped from ~ $34 down to ~$26, and now has climbed back up - there is reason for elevated vol, the question is, will the stock stick for two weeks?

This is trade analysis, not a recommendation.

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