Monday, February 14, 2011

United Rentals (URI) - Calendar Spread

URI is trading $32.78, up 4.9% with IV30™ up 5.0%. The LIVEVOL® Pro Summary is below.


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United Rentals, Inc. (United Rentals) is an equipment rental company and its network consists of 569 rental locations in the United States, Canada and Mexico.

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 <=70
Sigma1, Sigma2 >= 1

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 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). In terms of the specific vol levels, 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.

IV30™: 42.91
HV20™: 40.42
HV180™: 47.52

Selling anything above 52 vol in and of itself feels reasonable, a purchase below 37 (ish) would also seem reasonable in and of itself.

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

Feb options can be sold @ 57 and above vol, while Mar options are priced at ~ 42 vol.

Potential Trades to Analyze
1. Calendar spread on two-sides:
Sell the Feb 32/33 strangle @ $0.95 ~57 vol.
Buy the Mar 32/33 strangle for $2.85 ~43 vol.
Pay 1.90 to own Mar vs. Feb.
NB: URI has moved $1.50 today -- one more of those and this trade doesn't look very good.

2. Calendar spread one-sided:
a. Buy the Feb/Mar 33 call spread for $0.95
b. Buy the Feb/Mar 32 put spread for $0.95

3. Calendar spread one-sided with more risk
a. Sell the Feb 33 calls @ $0.50
Buy the Mar 32/34 call spread for $1.00
Pay $0.50, but be naked short the upside for a week.

b. Do a similar trade with the Feb 32 put and Mar 33/31 put spread.

This is trade analysis, not a recommendation.

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