Thursday, February 24, 2011

Big Lots (BIG) - Earnings Bet Against Vol

BIG is trading $39.66, down 1.0% with IV30™ up 0.3%. The LIVEVOL® Pro Summary is below.


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Big Lots, Inc. through its wholly owned subsidiaries is a closeout retailer. The Company’s merchandising categories include Consumables, Home, Furniture, Hardlines, Seasonal, and Other. The company has earnings due out in early March.

The company has traded over 8,700 contracts on total daily average option volume of just 2,704. The largest trade accounted for 8,000 contracts -- it was a vol sale:

Sell the Mar 40/42.5 strangle @ $2.80
Buy the Mar 37.5/45 strangle for $1.50

The trade collects $1.30 and risks $1.20, so better than a 1:1 MaxGain:MaxLoss ratio. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. Mar vol is up slightly (0.2 points), Apr is up a touch more (0.6 points).

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

It's interesting to see that the upside vol is bent up.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock exploded on 2-7-2011. The news from that day is included below:
Big Lots Inc. shares jumped 15% in the last few minutes of trading Monday after Bloomberg News reported that the discount retailer may sell itself. The company is exploring strategic options, including a possible sale, and is working with Goldman Sachs, Bloomberg said, citing an unidentified person with knowledge of the situation.
Source: MarketWatch, By Alistair Barr.

The large trade is an interesting one. Obviously if there's any kind of takeover (or takeover rumor) that pushes the stock higher, the trade will lose. The better than 1:1 MaxGain:MaxLoss is nice. Essentially, if you feel like there is better than a 50/50 shot that BIG stays inside the profit zone, the payoff would indicate there's a bit of edge to the trade. I've included the PnL on Mar expo. for the trade, below.

On March expo, this trade wins if BIG is in ($38.70, $43.80). This trade can also win if BIG doesn't move a lot on earnings, vol collapses and it's closed in the first week (ish) of Mar.  Please double check my math, too...

This is trade analysis, not a recommendation.

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