Monday, January 3, 2011

H&R Block (HRB) - Stock and Vol Climb on Credit Ratings

HRB is trading $12.77, up 7.2% with IV30™ up 11.9%. The LIVEVOL™ Pro Summary is below.


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I wrote about HRB on 12-27-2010:
H&R Block (HRB) - Credit Watch and Law Changes Pop Vol

Here's a quick review of the news:
NEW YORK -- Standard & Poor's affirmed its ratings on tax preparer H&R Block Inc. on Wednesday but said its outlook on the company is "negative."
S&P also removed Block's ratings from CreditWatch Negative. The ratings had been placed there in October, after the company said it was taking legal action to force HSBC's U.S. finance arm to offer refund anticipation loans for the 2011 tax season.

The company's "BBB/A-2" counterparty credit rating falls into S&P's investment-grade category.

S&P said it removed the company from CreditWatch after Block said that it is still in negotiations and litigation with HSBC. S&P said it believes that being able to offer refund anticipation loans will help Block attract and retain tax-preparation clients and that if it can't offer them, its revenue will suffer. Block's management has described the potential impact as "significant."
Source: AP

Tax prep company H&R Block announced on Friday that it had lost a contract with HSBC after a federal regulator told HSBC to stop offering refund anticipation loans. The Office of the Comptroller of the Currency prohibited HSBC (HBC) from offering the loans, which forced the bank to end its long-term contract providing loans to H&R Block (HRB) customers, H&R Block said in its release.

This story is still compelling to me given the stock pop.  Today, I found this stock using a custom scan I built searching for names where IV30™ is up at least 10% today. The scan details are below with a snapshot if you want to build it yourself in Livevol Pro.

Custom Scan Details
Stock Price >= 10
Average Option Volume >= 1,200
Days After Earnings >= 5 and <= 60
IV30™ Percent Change >= 10%
IV30™ >= 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

The HRB Charts Tab (vol only) is included (below): (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

IV30™: 48.35
HV20™: 40.57
HV180™: 41.01

The rise on IV30™ makes sense given the news, but why is the stock climbing? Hmm...

The Skew Tab snap (below) illustrates the vols by strike by month.

The skew bends to the upside in Jan, not in Feb. Note the fat vol difference between the Jan and Feb 14 OTM calls. Finally, let's look to the Options Tab.

Possible Trades to Analyze
1. Sell the elevated Jan skew versus Feb.
Sell 1 Jan 14 call @ $0.15 (~53 vol).
Buy 1 Feb 14 call for $0.35 (~45 vol).
Pay $0.20 for Feb upside.

2. Riskier:
Buy 1 Feb 13 calls for $0.75
Sell 2 Jan 14 calls @ $0.15
Pay $0.45 to get some more deltas, but be naked upside through Jan. If this trade works out ok (i.e. HRB stick below $14), then that long Feb 13 call can be spread off with a Feb 14 calls and possibly reduce the net debit to ~$0.15 for a $1 call spread.

3. The other side of the deltas:
Sell 1 Jan 12.5 put @ $0.40 (~47 vol).
Buy 1 Feb 13 put for $1.00 (~45 vol).
This gets some short deltas. If HRB can hold the stock level about here, that long Feb 13 put should be a winner on expo.

This is trade analysis, not a recommendation.

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