This options idea from IVolatility.com is based upon Friday’s closing prices. Check the option chain of the underlying for the latest prices.
In 2010, applying the adage “Sell in May and go away” worked out to a 9.4% decline in the S&P 500 Index. By the end of the decline, that began on April 26 and ended on July 1, the loss was 15.2%. This year the timing was not quite so clean since the S&P 500 Index made a high on May 2. It had been declining but was still above our upward sloping trend line until May 23 when it closed below the line, giving us the May sell signal. For options trading investors here is a volatility-related strategy for a retailer that is a possible takeover candidate.
Big Lots Inc. (NYSE: BIG) 32.42. Since this closeout retailer announced it was looking for a buyer last February the stock climbed as high as 44.44 on April 5, but it has been downhill since, returning to the preannouncement price. Now that the takeover premium is gone it may be worth looking at as an operating company. The trailing 12-month price-to-earnings ratio is 11, and the forward ratio is 10, however there is no dividend so the valuation rests on its growth estimate with an attractive price to earnings/growth ratio of .86.
The current Historical Volatility is 36.12, with an Implied Volatility Mean of 31.41 for an IV/HV ratio of .87 and a bearish 2.00 put-call ratio. Friday’s options volume was 5,063 contracts while the 5-day average volume is 10,300 contracts. Consider this credit spread combination idea.
| B/S | Qty | O/C | USym | Exp | Strike | P/C | Price | IV |
| B | 1 | O | BIG | Jul | 35 | Call | .55 | 30.42 |
| S | 1 | O | BIG | Jul | 37.5 | Call | .20 | 31.52 |
| S | 1 | O | BIG | Jul | 30 | Put | .55 | 31.82 |
| Credit | .20 |
Use a close back below the recent pivot at 30.83 as the SU (stop/unwind) or be prepared to take the stock by assignment in the event is closes below 30 on the July expiration.
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