Thursday, August 11, 2011

Home Depot (HD) - Cheap Elevated Earnings Vol?

HD is trading $29.91, up 4.9% with IV30™ down 10.0%. The LIVEVOL® Pro Summary is below.


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The Home Depot, Inc. (The Home Depot) is a home improvement retailer. The Home Depot stores sells an assortment of building materials, home improvement and lawn and garden products and provide a number of services.

This is an interesting one where the vol is elevated, yet it somehow feels cheap... Huh?...

Let's start with the Charts Tab (6 months), 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 stock drop and the corresponding vol pop. This chart looks like any number of companies randomly selected from the S&P 500 -- it's systematic risk that's driving individual equities, so this chart isn't unique. The IV30™ is elevated to the historical measures, specifically:

IV30™: 43.39
HV20: 39.01
HV180: 23.16

So the implied is elevated to the historical measures. What is unique to HD is that the company has earnings due out this expiration cycle, 8-16-2011 BMO. Hmm...

Let's turn to the Skew Tab.

The skew shape is normal, even pretty, with the downside bid relative to the upside. The term structure reveals a monotonic decrease moving from the front month to the back. The skew ain't the story, IMO.

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

Here's where it gets interesting. The last five day over day changes (close-to-close) for HD have been:

So the absolute daily average change has been $1.38... The ATM straddle in Aug is priced at $1.83. Throw in that there's an earnings cycle (vol event) embedded in the options, and all of a sudden that elevated vol, kinda feels cheap?... No?...

For what it's worth, HD has only averaged a $0.60 move over the last 8 quarters the day after earnings with a movement range of [$0.32, $0.93]. In other words, HD hasn't moved a dollar off of earnings in more than two years... So maybe earnings isn't that big of a deal?...

This is trade analysis, not a recommendation.

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