Thursday, June 23, 2011

BJ's Wholesale (BJ) - Elevated Vol, Depressed Earnings and a Takeover

BJ is trading $47.74, up 1.0% with IV30™ up 4.2%. The LIVEVOL® Pro Summary is below.


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BJ’s Wholesale Club, Inc. (BJ’s) is a warehouse club operator in the eastern United States. As of January 29, 2011, the Company operated 189 BJ’s warehouse clubs, 103 of which operate gasoline stations, in 15 states.

Here's a snippet of an article from Wall St. Cheat Sheet:
Last week, private equity firms Leonard Green and CVC Capital made an offer to buy BJ’s Wholesale (NYSE:BJ) for an undisclosed sum, rumored to be about $50 per share. With shares currently trading at $47.36, BJ’s is reportedly holding out for more money, hoping to get the offer up to $55 a share.
Source: Mergers & Acquisitions [...]

Today the stock came up on the a real-time custom scan for calendar spreads between the front two months. Note that the second month (Aug) likely has an earnings cycle, making this quite an interesting vol phenomenon.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 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.

Let's look to the Skew Tab (below).

We can see that while the shapes of the months are similar, the front is elevated to the back. There's also a slight bend up to the OTM calls (55 strike) in Jul, reflecting upside risk.

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).

We can see the gap up in early Feb on the takeover news from $43.04 to $48.25. With the stock now trading $47.74, the market is still pricing some non-trivial probability that BJ is taken over -- it's the uncertainty that has the vol elevated, irrespective of the earnings date. We can see the IV30™ is elevated relative to the short-term historical vol (HV20) and the long-term historical vol (HV180). Specifically:

IV30™: 37.98
HV20: 26.45
HV180: 30.00

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

Potential Trades to Analyze
1. Calendar spread:
Owning Aug against Jul yields a vol scalp and probably picks up the earnings event. Friday of expiration is Aug 19th. The last two years earnings have been on 8-19-2009 and 8-18-2010 -- both were just before Aug expiration. This trade is short gamma and long vega -- both of which are losers to a takeover announced before Jul expiration.

2. Sell the downside
While ~38 vol is elevated, ~49 vol is really elevated. The Jul 42.5 puts are priced at 48.89 vol, so, ya know... Also, a Jul 42.5/45 1x2 put spread (selling two 42.5 puts) might be done for even and is safe to $40 (and naked short options below that).

This is trade analysis, not a recommendation.

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