Wednesday, December 28, 2011

Hartford Financial (HIG) - Depressed Vol, Earnings Patterns and Vega

HIG is trading $16.19, down 1.0% with IV30™ up 3.3%. The LIVEVOL® Pro Summary is below.


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The Hartford Financial Services Group, Inc. (together with its subsidiaries, The Hartford) is an insurance and financial services company.

I found this stock using a real-time custom scan. This one hunts for low vols. I have combined that low vol analysis with some historical earnings move analysis. Let's start with the custom scan details and the vol comps.

Custom Scan Details
Stock Price GTE $7
IV30™ - HV20™ LTE -8 GTE -40
HV180™ - IV30™ GTE 7
Average Option Volume GTE 1,200
Industry != Bio-tech
Days After Earnings GTE 32

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 short-term implied vol (IV30™) that is depressed 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 purchasing depressed IV30™ relative to HV20 simply because of a large earnings move.

The HIG 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).

Like the MS post earlier today, HIG stock is off from it's highs quite substantially. In late Jul this was a ~$27 stock. As of this writing it's down 40% from those levels. On the vol side,this is one of those interesting stocks where the implied tends to trade below the realized vol. In English, owning the vega in this name tends (or has tended) to be a winner with proper gamma scalping. As of right now that depressed implied to historical has found a rather large(ish) difference. Specifically:

IV30™: 44.98
HV20: 60.31
HV180: 61.04

HIG has an earnings report due out in early Feb (ish). The last two years earnings were reported on 2-8-2010 and 2-7-2011 following 11-3-2009 and 11-2-2010 earnings dates. The last earnings report for HIG was 11-2-2011, so it might be a reasonable guess that the next earnings report will be in the Feb cycle but outside (after) Jan.

I've included some stats surrounding the one day before and after earnings reports for HIG, below.

We can see the absolute value in stock change (in % terms) is 4.57%. In English, for the last eight earnings cycles, HIG stock has moved on average 4.57% (in absolute value) the one day following earnings.

Let's turn to the Skew Tab, below.

We can see that the Jan ATM options are priced below Feb (in vol terms). But, that Feb / earnings vol is showing a fairly slight elevation. Let's turn to the Options Tab for some more detail.

We can see Feb vol is priced at ~46% compared to Jan 44%. Looking back to that Charts Tab snapshot (above), we can see that 46% vol is still depressed to the two historical measures. Of course, those historical measures may look different in a month.

Looking more closely at Feb, we can see that the ATM (16 strike) straddle is priced to $2.26 fair value. That represents ~14% of the current stock price. It's interesting to look at that straddle value relative to the prior earnings moves (which are represented above as just a single day).

This is trade analysis, not a recommendation.

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