Calls To Arms

• Posted by Adam Warner
• on November 23rd, 2009

With volatility a tad low (I’m being polite) across the board, it’s certainly not a bad time to sock some longer term calls away in names you like. Jim Strugger of MKM Partners has a list of 25 such names, including National Oilwell Varco (NOV)

With  implied  volatility  in  each  of  these  stocks  within  15%  of  their  long‐term  averages,  we  like  buying  ~45  delta  calls  in  a  handful  of  names  with  April‐June  2010  expiration,  depending  on  availability. or  example,  #13  ranked  National  Oilwell  Varco  (NOV)  reported  earnings  that  beat  the  consensus  forecast  by  19.9%  and  subsequently  35%  of  the  24  analysts  that  cover  the  name  revised  full‐year  2010 earnings  higher.    There  is  23.9%  upside  to  the  consensus  price  target,  and  3‐ month  implied  volatility  at  46.6%  is  6.2%  below  its  5‐year  average.   Simply  put,  the  stock  has  significant  earnings momentum,  meaningful  upside  to  the  analysts’  price  target,  and  volatility  is  cheap  enough  to  gain  exposure  via  outright  call  buying.    With  a  stock  reference  of  $42.79/share  we  would  recommend  buying May  2010  47  strike,  44  delta  calls  for  $3.90.      

The stock is $1.50 higher this morning, so the 48′s are now the option that fit this bill.

I know about 0 on fundamentals other than I always like energy stocks, so we’ll stick to the assumption that you like the concept of going long NOV and look at whether this play makes some sense. And imho, it’s a pretty cheap bullish play. Options sit near 52 week lows in all time frames. And they’re very much in line with historical volatility which has hovered more or less in this range for the past half year.

You pay a modest premium to go out to May, as they trade about 3 volatility points above Jan. options, but that’s pretty standard fare. 

 

 

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