Tuesday, December 31, 2013

Sears (SHLD) - Calendar Volatility Difference Opens to Elevated Jan; Parabolic Skew Persists

SHLD is trading $48.89, up 2.5% with IV30™ up 3.0%. The LIVEVOL® Pro Summary is below.

Provided by Livevol

Sears Holdings Corporation (Holdings) is a retailer with 2,172 full-line and 1,338 specialty retail stores in the United States operating through Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears) and 500 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (Sears Canada), a 95%-owned subsidiary.

The stock just came up on a real-time custom scan. This one 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

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

Provided by Livevol

While we can see the vol difference (and thus the trigger for the scan), I also note a parabolic skew shape.  The option market reflects elevated upside and downside risk relative to the at-the-money (ATM) options.  This skew shape is in fact normal for SHLD and has held for about a year.  However, in general, this skew shape is not normal.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

This parabolic shape results in a volatility difference that grows as we move away from the ATM options.  We'll see this explicitly in a sec.

Now we can turn to the two-year Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

For all of the fuss surrounding SHLD, over the last two-years the stock has risen from $31.43 to now $48.89 for a 55.6% rise.  In that same period the S&P 500 is up ~44.5%.  So, in English, SHLD has outperformed the index over a two-year period.  The one-year comparison sees SHLD up ~18.10% while the index is up ~29.5%.

But this is a vol story, so looks let's turn to the two-year IV30™ chart in isolation, below.

Provided by Livevol

A few things to note:

1. The IV30™ traded well above 110% about two-years ago.
2. On a one-year measure, the IV30™ is in the 81st percentile (so pretty elevated).
3. The IV30™ breached its annual high on 12-16-2013 (74.79%) and has dipped a bit since then.

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

Provided by Livevol

Here's where we can see the explicit result of the parabolic skew:

While the ATM ($49 strike) vol difference is ~10 vol points, the Jan/Feb 39 put spread vol difference is ~13 vol points and the Jan/Feb 62.92 call spread vol diff is ~16 vol points.

This is trade analysis, not a recommendation.

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  1. Is there some sort of event in January causing higher IV of the Jan options?

    1. I'm not sure. Earnings look to be outside of Feb and I don't have any great visibility into what event could be propping up vol in Jan.

  2. It looks like even the Dec 13th options prior to their last earnings had lower IV than the Jan 14s are at now.