Thursday, March 3, 2011

Waste Management (WM) - Elevated Vol

WM is trading $37.25, up 1.1% with IV30™ down 4.2%. The LIVEVOL™ Pro Summary is below.


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Waste Management, Inc. (WMI) is a provider of integrated waste services in North America. I found this stock using a real-time custom scan. This one hunts for high vols.

Custom Scan Details
Stock Price >= $7 <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated 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 selling elevated IV30™ simply because earnings are approaching.

The WM 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™: 21.75
HV20™: 9.00
HV180™: 13.61

So, IV30™ is elevated relative to the short-term and long-term realized movement of the stock.

Now we look to the Skew tab (below).

The skew looks normal across the front three months without any obvious spread opportunities that I see.

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

Possible Trades to Analyze
1. Sell the Mar 37 straddle @ $1.30.
Buy the Mar 36/38 strangle for $0.60.
Receive $0.70. Every nickel counts on these trades. This yields a MaxGain:MaxLoss of 1.16:1 and requires WM be in the range ($36.30, $37.70) on Mar expo to be profitable.

2. A little twist:
Sell the Mar 36/37 strangle @ $0.95.
Buy the Mar 35/38 strangle for $0.45.
Receive $0.50. This yields a 1.11:1 MaGain:MaxLoss and requires WM to be in ($35.50, $37.50) on Mar expo. Note the greater downside room, but less upside.

3. Totally backwards:
Since the option markets reflect more risk (elevated vol), maybe 22 vol is a purchase...

NB: A bullish or bearish expectation in this stock in the near-term makes trades #1 and #2 analyzed uninteresting or even inappropriate.  Also, please check my math -- there's no guarantee I can add.

This is trade analysis, not a recommendation.

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