Friday, January 14, 2011

Mastercard (MA) - Depressed Vol into Earnings

MA is trading $236.00, up 1.1% with IV30™ down 1.4%. The LIVEVOL® Pro Summary is below.


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I found this stock using a real-time custom scan. This one hunts for low vols. Interestingly, this low vol also includes an earnings cycle in Feb.

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

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 MA 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™: 28.64
HV20™: 44.13
HV180™: 36.29

So, IV30™ is depressed relative to the short-term and long-term realized movement of the stock. We can see the huge gap down on the regulatory ruling (regulatory ruling?) that smacked both MA and V so that has an effect on making HV20™ seem elevated. Since that massive drop, MA stock has recovered nicely, up $15, but still ~$20 lower than it's prior levels.

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

Possible Trades to Analyze
1. If you want to bet that this stock is going to move on earnings news (or any other news) in the Feb cycle:
Buy the Feb 235 straddle for $16.90.

2. Sell some stuff around #1.
Sell the Feb 220/255 strangle @ $5.00.
This brings the net debit down to $11.90, but leaves a MaxGain of just $3.10 to the downside.

3. Play it totally backwards, sell the Feb 235 straddle and buy the wings around it to cover. The low vol implies that at least some of the stock moving news is out already.

This is trade analysis, not a recommendation.

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