Blue Nile: Stock Whips, Vol Pops, But Is It High Enough?

Blue Nile, Inc. (NILE) is a online retailer of diamonds and fine jewelry. The Company derives its revenues from its three websites: www.bluenile.com, www.bluenile.ca and www.bluenile.co.uk. Its Website serves the United States and 16 additional countries and territories globally.

This is a vol note with an interesting stock and vol trend developing. I found this stock using a custom scan searching for names where IV30™ is up at least 10% on the day. The scan details are below with a snapshot if you want to build it yourself in Livevol® Pro.

Custom Scan Details
Stock Price GTE 10
Average Option Volume GTE 1,200
Days After Earnings GTE 5 and LTE 60
IV30™ Percent Change GTE 10%
IV30™ GTE 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

The NILE Charts Tab is included (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 the pop off of earnings on 8-3-2012 (report was released 8-2-2012 AMC). The stock rose from $23.75 to $32 or nearly 35% in a day. From that day forward until 9-13-2012, the stock continued to rise, hitting a six month closing high of $42.50. In English, after popping 35% off of earnings, the stock rose another ~33% in the following six weeks. But then... it stopped.

Since 9-13-2012 the stock is down nearly $5 (~11%), including the drop today. I'm not a chartist, but that stock graph looks ominous. The 52 wk range in stock price is [$22.94, $50.00].

On the vol side, we can see how elevated the implied got into the last earnings release, and how even that 120%+ level wasn't high enough given the move. What's interesting is how low the implied has gotten after earnings. The vol crush was a must, but given he recent stock move up and then more recently, down, the level of IV30™ is noteworthy. Even after the pop today, IV30™ is in the 13th percentile (annual). The 52 wk range is [39.22%, 120.71%]. Hmmm....

Let's look to the Skew Tab snap (below) to examine the vols by strike by month.

The red curve represents Sep, the yellow is Oct and the green curve represents Nov. The next earnings release for NILE should be well within the Nov expiry. It's that vol event that has the Nov options elevated to Oct. I also note how consistent the skew shape is across the front three expiries and how elevated the front is to Oct.

Finally, let's look to the Options Tab.

Across the top we can see the vols are priced to 58.81%, 50.91% and 64.68%, respectively for Sep, Oct and Nov. It's an in interesting to question to ponder if that Oct vol at ~51% really makes sense given the recent stock moves -- including the move today. Just sayin'...

Disclosure: This is trade analysis, not a recommendation.