Thursday, June 27, 2013

Arkansas Best (ABFS) - Everything at Once; Vol at Multi-year Highs, Stock at Annual High, Earnings Vol Priced below July Vol

ABFS is trading $19.79, up 2.4% with IV30™ down 1.2%. The LIVEVOL® Pro Summary is below.

Arkansas Best Corporation is a holding company through its subsidiaries is engaged primarily in motor carrier freight transportation. The Company’s principal operations are conducted through its Freight Transportation operating segment, which consists of ABF Freight System, Inc. and other subsidiaries of the Company that are engaged in freight transportation.

I found this stock using a real-time custom scan I built in Fidelity. This one hunts for calendar spreads between the front two monthly expiries. I've included the results of the scan below. But, there’s a second and third part to this story – like a multi-year in IV30™ and earnings that are likely in the back month (meaning the depressed vol month). Now, we have a vol story…

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

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

We can see pretty clearly how the front month (Jul expiry) is elevated to the second month (Aug expiry). It’s this vol difference that triggered the scan. But there is a lot more going on…

Let’s turn to the one-year ABFS 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 that absolutely explosive price appreciation since 5-1-2013, when the stock closed at $9.73. As of today, the stock is up more than 100% in less than two-months and that level is an annual high.

But, there’s more… a lot more… Let’s turn to an isolated two-year IV30™ chart, below.

There are ebbs and flows, but if we look at the far right hand side, we can see that other than the small dip today, the implied is trading at multi-year highs. So we have a stock up 100% in two-months and vol at multi-year highs and a calendar diff opened up between the front two-months… But there’s more yet…

Last year ABFS released earnings on 4-27-2012 and then on 7-31-2012. That means earnings fell in the Aug expiry and outside of Jul. This year ABFS released earnings on 4-30-2013, which would mean there is a likelihood that the next earnings release will be again be outside of Jul expiry but inside Aug.

Putting that altogether means that the elevated vol in Jul to Aug reflects not only multi-year highs in risk in Jul, but risk that supersedes that found in the earnings release. This is a really compelling coincidence of vol and stock price phenomena.

For completeness, the Options tab is included below.

Across the top we can see that Jul is priced to 81.53% and Aug is priced to 74.14%. Now we wait and see – what’s coming in the next four weeks (i.e. Jul expiry). The option market reflects a lot of risk – more so than in the last two-years.

This is trade analysis, not a recommendation.

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