Friday, September 30, 2011

Home Depot (HD) - Elevated Vol

HD is trading $33.08, down 2.1% with IV30™ up 3.4%. The LIVEVOL® Pro Summary is included 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.

I found HD using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 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 HD 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 stock dropped from $36.39 on 7-26-2011 all the way to a low of $28.13 on 8-9-2011 or 22.3% in a two week period in what was a 24.55 vol stock (that's an annualized vol number). Since then the stock has recovered to now in the low 30's.

On the vol side, we can see the IV30™ is now just under 40 (38.18) while the short-term and long-term realized vols are depressed to that level as the stock has found a bit of a quiet period (at least compared to that abrupt two week period). It's this relative quiet time of late that has created the vol diff between implied and realized. Specifically:

We can see:
IV30™: 38.18
HV20: 27.30
HV180: 25.98

The next earnings release for HD should be at the end of the Nov options cycle (or after).

Let's turn to the Skew Tab, below, to examine the month-to-month and line-by-line vols.

The skew doesn't show any kinks from one-sided order flow and the term structure itself is normally shaped. Note that the red curve represents the Oct 7 weekly options.

Let's look to the Options Tab (below) for completeness.

Possible Trades to Analyze
Selling the ATM meat and covering with the wings is a reasonable way to examine the elevated vol. Alternatively, the 52 wk range for HD is [$27.92, $38.54], selling the downside on a ratio with some space between the long and short strikes might be interesting as well.

This is trade analysis, not a recommendation.

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