Monday, July 16, 2012

Family Dollar (FDO) - Unusual Elevated Vol in July; Calls Trading

FDO is trading $69.03, up 2.3% with IV30™ up 2.6%. The LIVEVOL® Pro Summary is below.


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Family Dollar Stores, Inc. (Family Dollar) operates a chain of more than 7,000 general merchandise retail discount stores in 44 states, providing primarily consumers with a selection of merchandise in neighborhood stores. The Company merchandise assortment includes Consumables, Home Products, Apparel and Accessories, and Seasonal and Electronics.

This is an interesting vol note, specifically elevated front month vol relative to the back. I found FDO on a real-time custom scan that hunts for calendar spreads between the front two months.

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.

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

We can see that rather large vol difference between the front and the back months. The next earnings release for FDO should be in late Sep -- so inside the Oct expiry. Not only is it odd how elevated Jul is to the other months, but it's also odd that Oct and Aug are essentially equal. I would have expected Oct to have higher vol than Aug first due to the time of the year (Aug can be slow, Oct can be... not slow), and second due to earnings.

In all, this is a compelling if not confusing term structure. The elevated vol in Jul feels like a same stores sales comp (or w/e) is due out this week, which may equivalent in many ways to an actual full blown earnings announcement. But, the company just reported earnings on 6-28-2012. I don't actually know why the vol is so elevated.

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).

On the stock side, we can see the nice run up from the mid $50's to now just under $70 over the last six months. On the vol side, we can see how the implied dipped off of earnings (normal) but has come back up a bit as the stock has sat still. The implied is now elevated to both the short-term and long-term historical realized vols. The vol comps as of right now are:

IV30™: 29.82%
HV20™: 24.79%
HV180™: 24.10%

Noting that IV30™ does not include the front month on expo week, we can put the 41% Jul vol into context. It's high... (genius observation, I know).

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

Across the top we can see the monthly vols are priced to 41.63%, 29.82% and 30.15%, respectively. I also note that the most active strike (in terms of trade volume on the day) is the Jul 70 calls, where ~1,600 have traded. The largest print was a purchase 1,120x for $0.45 (outright).

This is trade analysis, not a recommendation.

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1 comment:

  1. This is very informative and reliable for future reference. You did a great job my friend.