Wednesday, March 30, 2011

Power-One (PWER) - Depressed Vol into Volatile Earnings

PWER is trading $8.85, up 1.8% with IV30™ down 4.9%. The LIVEVOL™ Pro Summary is below.


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Power-One, Inc. (Power-One) is a designer and manufacturer of energy-efficient power conversion and power management solutions for renewable/alternative energy, routers, data storage, servers and data centers, wireless communications, optical networking, semiconductor test equipment, industrial markets and custom applications.

I found this stock using a real-time custom scan. This one hunts for low vols.   This one has a little twist.

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

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 PWER 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™: 52.99
HV20™: 65.20
HV180™: 70.50

So, IV30™ is depressed relative to the short term and long term realized movement of the stock. Another thing to note -- this time in the upper portion, look how much the stock has moved on the last two earnings cycles (circled in yellow).The last cycle in particular, close-to-close the stock moved from $11.75 to $9.26 or 21%. More on that in a sec...

We can glance at the Skew Tab below.

The shape is normal for both months, and we can see that May is substantially elevated to Apr b/c earnings are due out in the May cycle.

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

Notice that the May ATM strangle (8/9) is priced at ~58 vol. From the Charts Tab breakdown above, we know that HV20 and HV180 are both above that level, and the last two earnings cycles resulted in some fairly large volatility (stock movement).

Possible Trades to Analyze
1. Ignore earnings, buy the depressed Apr vol.
The Apr 8/9 strangle is priced at ~ 47 vol. That's well below the short-term and long-term realized vols.

2. Buy earnings vol.
As I mentioned above, even the earnings (May) vol is lower than the trend in the realized. A purchase of the 8/9 strangle (or 8 straddle), may be worth examining.

3. Play it totally different.
If there's a lot of anticipation coming into the next earnings cycle, then maybe Apr vol should be cheap. Perhaps an Apr sale to fund a May purchase is worth analyzing.

This is trade analysis, not a recommendation.

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