Tuesday, April 5, 2011

Best Buy (BBY) - Calendar to OTM Calls Opens Up

BBY is trading $28.69, up 1.9% with IV30™ unched. The LIVEVOL® Pro Summary is below.


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Best Buy Co., Inc. is a multinational retailer of consumer electronics, home office products, entertainment software, appliances and related services.

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 the front month is elevated to the back. More interesting to me is the upside skew -- the vol difference opens up even more to the OTM calls yielding some interesting calendar spreads worth examining.

Now 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).

The vol looks right about smack in the middle fair value. The most noticeable part of the charts tab is in the equity movement -- BBY catapulted down on the last earnings release going from $41.70 to $35.52. BBY's next earnings cycle is likely in June, so this isn't one of those extra "special" calendars where an earnings month has lower vol than the front.

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

Potential Trades to Analyze
Without getting into specifics, it looks like any kind of calendar spread (either diagonal or plain vanilla) looks like it's worth examining given the vol difference that opens up to the OTM calls month-to-month.

The overall vol level in both Apr and May seems fairish -- it's really the vol difference that caught my attention.

This is trade analysis, not a recommendation.

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