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December 14, 2012 / redman59

A Bullish Play in Auto Parts

Looking at industry breadth Auto Part Stores was a top performer with 80% (consisting of 5 stocks) having up days.  This in itself is not the only factor when I single out industries as one could say that 5 stocks is not a lot.  Another metric I use is the Daily Hybrid Change and Auto Part Stores ranked 5th out of 196 industries and also ranked 10th in Weekly Hybrid Change.  This warranted some further study into the individual stocks within the industry (information provided by the PPT).

Looking at the charts I like the risk reward in AZO (AutoZone Inc.).  This has been a hot stock in 2010 & 2011 but mostly a consolidation in 2012 between 355 and 385.  Below is a weekly logarithmic chart of AZO and the past 3 years.


Below is a daily chart of AZO and you can see how it has been consolidating for the most part of 2012 and how it has bounced between 355 and 385.  Looking at the volume on AZO it is interesting to see that a majority of the above average moves happened into those support/resistance levels, around them, or at earnings which is the case in most stocks.  The latest volume move is highlighted on the chart below at the 355 level.


With this information there are several options strategies that one could play that would attempt to capture the range and would be based on time decay (butterflies, condors, etc.) or one could play an outright bullish strategy, which is what I am looking at.  Looking at the volatility chart we can see that AZO is in the bottom of its 90 day implied volatility range so I am not looking to be short vega but would rather be long vega.


One could choose the calendar strategy but I only prefer these on weekly options so that I am able to roll the short strike.  My choice is the Bull Call Spread as this will get me long vega, reduce time decay,  and reduce cost over the naked option.  Looking at the past I am looking at a 15-20 bar hold (3-4 weeks) so the January chain would suit me fine with an extra week of time if my price objective of 380 is not met.  Trade idea is the Jan 360/380 Bull Call Spread for a debit of 6.75. The max risk id $675.00 and the max gain is 1325.00 if at or above 380.00 on expiration in January.


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