Monday, June 18, 2012

GameStop (GME) - Elevated Vol... Or Not?...

--- OVERVIEW ---
GME is trading $18.14, up 1.7% with IV30™ down 4.6%. The LIVEVOL® Pro Summary is included below.


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GameStop Corp. (GameStop) is a holding company. GameStop is a multichannel video game retailer. It sells new and used video game hardware, physical and digital video game software, accessories, as well as personal computer (PC) entertainment software and other merchandise.

I found this stock using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol. An interesting phenomenon has occurred in terms of the vol level as earnings approach in Aug. First, let's look at the scan details, below.

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.

--- ANALYSIS ---
The GME Charts Tab (six months) is included below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side, we can see the disturbing trend which is, for lack of a better word, bad. On 1-25-2012, the stock closed at $25.00. As of this writing, the price is down 27.4% from that level while the SPX is up 1.6% in that same time frame. Looking even further back, GME closed at $26.80 exactly one year ago. The 52 wk range is [$17.11, $27.40], so the price action is getting dangerously close to an annual low. The most recent earnings report came out on 5-17-2012 BMO, and saw the stock drop from $20.84 to $18.52 or down 11.1% in a day.

On the vol side, we can see how the implied is now elevated to both of the historical realized vol measures (and thus the scan trigger). The dip in HV20™ reflects the fact that it's now been more than 20 trading days since the earnings drop on 5-17-2012. The vol comps are:

IV30™: 42.41%
HV20™: 29.08%
HV180™: 34.24%

What's interesting about the vol level is that while it is elevated to the historical realized measures, it's in fact depressed relative to it's own annual history. The 52 wk range in IV30™ is [28.99%, 63.44%], putting the current level in the 38th percentile -- certainly not an "elevated" state relative to that measure. The annual highs in IV30™ all surround earnings (which makes sense). More on that in a sec...

Let's turn to the Skew Tab, below.

We can see that Aug is elevated to Jul -- that's likely due to the next earnings release which could be inside Aug expiry (near the end). But, if we look a little more closely at the vertical axis, we can see that the vol diff isn't tremendously large. The Aug vol would be in the 49th percentile of the IV30™ annual range.

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

Across the top we can see the monthly vols 42.41% and 46.07% for Jul and Aug, respectively. This poses an interesting reality where the Jul (non-earnings vol) is "expensive", while the Aug (earnings vol) is "cheap." Of course, much of this is predicated on there in fact being an earnings event in Aug, which is not a certainty.

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