Monday, April 1, 2013

Humana (HUM) - Vol Breaches Annual High; Buckle Up for News Pre-earnings; Then Buckle Up Again for Earnings; Two Vol Events in a Month

HUM is trading $70.15, up 1.5% with IV30™ popping 11.2%. The LIVEVOL® Pro Summary is below.


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Humana Inc. (Humana) is a health care company. Humana operates in three segments: Retail, Employer Group, and Health and Well-Being Services.

I found this stock using a real-time custom scan that hunts for calendar spreads between the front two monthly expiries. The interesting thing here is that HUM has earnings due out in the back month – or that’s my projection, meaning that the earnings can be owned for less than the front. Further, the stock has breached an annual high in IV30™ today – making this a wildly compelling phenomenon. Whatever the news that’s coming, the option market reflects not only greater risk to it than earnings, but greater risk now than at any time in the last year.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 > 7
IV30™ GTE 30
Average Option Volume GTE 1,200

The goal with this scan is to identify back months that are cheaper than the front by at least 10 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume) and enough strikes to spread and thus a minimum stock price. I also require a minimum vol level in order to avoid any boring ETFs (or whatever).

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

We can see quite clearly how elevated Apr is to May (red curve is above the yellow curve). For the last two years HUM has had earnings on 5-2-2011, 4-30-212 – both of which are outside of Apr expiry. I see the same timing pattern this year – that is, I project the same pattern based on the last earnings date of 2-4-2013.

The one-year HUM 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).

Y-O-Y it has not been a pretty picture for HUM with the stock dropping from $91.85 to now in the $70 range. Also, if you look at the last four earnings reports (the blue “E” icon) you can see quite substantial moves off of the news. So, in English, earnings reports are volatility events for HUM, yet whatever is coming before the earnings date appears to be an even greater volatility event.

Let’s turn to the one-year IV30™ chart in isolation, below.

We can see that with the pop in the implied today, HUM has breached an annual high in IV30™. So whatever the news that’s coming, the option market reflects not only greater risk to it than earnings, but greater risk now than at any period in the last year.

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

Across the top we can see that Apr is priced to 52.23 and May (with earnings) is priced to 41.87%. Something is coming for HUM – buckle up. Then re- adjust, and buckle up for earnings again.

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