Wednesday, July 6, 2011

Gap (GPS) - Vol Pattern to Earnings

GPS is trading $18.25, up 0.4% with IV30™ up 0.6%. The LIVEVOL® Pro Summary is below.


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The Gap, Inc. is a global specialty retailer offering clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands.

I’ve been on a calendar spread kick of late as Jul vol has remained elevated for a number of companies relative to the approaching earnings cycle in the Aug options. GPS also has come up on the real-time custom scan that hunts for calendar spreads between the front two months. The next earnings report is due out after Jul expo.

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.

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).

Last year the summer earnings report for GPS was released on 8-9-2010 and this year I see the report date is set for 8-18-2011 on the company’s IR site. The Aug options expire on 8-20-2011 meaning the depressed vol in Aug to Jul does include earnings.

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).

Here’s where it gets interesting. The last earnings report on 5-19-2011 AMC catapulted the stock down 17%. In other words, the stock can move on earnings, so owning that vol for less than Jul may be an interesting play.

On the vol side, the IV30™ is well above the short-term historical vol (HV20) and about equal to the long-term historical vol (HV180). Specifically:

IV30™: 33.27
HV20: 21.31
HV180: 33.15

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

I wrote about this one for (OptionsProfits) so no specific trade analysis here -- but the vol diff may be worth some analysis.

This is trade analysis, not a recommendation.

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