Stocks with high SVS readings could present attractive premium-buying opportunities for options traders
When making the decision to buy or sell premium on a particular stock's options, an assortment of fundamental, technical, and sentiment indicators is useful in determining the best strategy. One tool that can be especially helpful in targeting prime option-trading opportunities is Schaeffer's Volatility Scorecard (SVS).
In a nutshell, the SVS drills down on stock's that have historically underpriced or overpriced options over the past year. On a scale from 0 to 100, premium sellers would target a stock with a low SVS, as this suggests the equity has tended make smaller moves than what the options market has priced in. Meanwhile, option buyers would key in a stock with a high SVS, as this means the security has historically made outsized moves, relative to what the options market has expected.
In the table below, Schaeffer's Senior Quantitative Analyst Rocky White compiled a list of the 20 stocks with the highest SVS values at the moment. Among the equities option buyers should be keeping an eye on are weight loss specialist Weight Watchers International, Inc. (NYSE:WTW) and mining equipment maker Joy Global Inc. (NYSE:JOY).
While WTW is off 36% in 2016, the stock has recently found a foothold atop its 30-day moving average since early March. Meanwhile, the stock's 50-day call/put volume ratio of 4.45 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is in 92nd percentile of its annual range.
Plus, its Schaeffer's put/call open interest ratio (SOIR) of 0.73 is lower than 98% of the past year's worth of readings -- meaning near-term traders are close to a call-skewed extreme. However, with nearly 69% of WTW's float sold short, this high level of call buying could be a result of short sellers using protective calls to hedge against upside risk.
In any case, WTW's short-term options buyers could be getting an relatively good deal right now. Specifically, the equity's near-term options are pricing in rather low volatility expectations, per its Schaeffer's Volatility Index (SVI) of 90% -- in 34th annual percentile. Meanwhile, the stock's SVS sits at 98, indicating that Weight Watchers International, Inc. has tended to make much wider moves than the options market has priced in over the last 52 weeks.
JOY, meanwhile, has added 66% so far this year to trade at $20.70. Additionally, the shares have outperformed the S&P 500 Index (SPX) by an astonishing 102 percentage points over the last three months -- and are comfortably on track to notch their first close north of their 10-month moving average since August 2014.
Sentiment remains rather bearish, though, with 11 out of 14 analysts rating JOY a "hold" or "strong sell." Plus, short interest accounts for a lofty 22.6% of the security's available float, or 7 days' worth of trading, at JOY's typical daily pace.
At the ISE, CBOE, and PHLX, the equity's 50-day put/call volume ratio of 1.55 sits in 89th percentile. Near-term options traders are put-skewed, as well, considering the stock's SOIR of 1.35 ranks higher than 70% of the past year's worth of comparable readings. Given JOY's technical tenacity, an unwinding of this rampant skepticism could help spur the stock higher. However, put buyers can rest easy knowing the most they've risked is the initial premium paid, and with an SVS of 97, it appears as if Joy Global Inc.'s are attractively priced at current levels, from a volatility perspective.