When picking an option to trade, aside from using our Expectational Analysis® method, it's also useful to know when a stock's options are attractively priced. One of the major factors in options pricing is volatility, which is why we created the Schaeffer's Volatility Scorecard (SVS). Put simply, this indicator measures, on a scale from zero to 100, how much volatility a stock has actually seen over the previous 12 months, compared to the volatility expectations the options market had priced in. The higher the SVS, the more the stock has historically outperformed the market's expectations -- thus, making the options a potentially better bargain for buyers. Among the stocks currently sporting elevated SVS readings are chipmaker NVIDIA Corporation (NASDAQ:NVDA) and healthcare concern Abbott Laboratories (NYSE:ABT).
After a massive run higher, NVDA has been taking a breather in recent weeks, but seems to have found a foothold above the 20-day moving average. Off 1% at $105.48, the shares are sitting on a jaw-dropping 290% year-over-year lead. Plus, NVDA has historically been among the top performers during the first year of a presidential term cycle, as this year is. Over the past three cycles, the stock has been positive each time, averaging a return of 72.4%.
Still, there's plenty of pessimism toward the stock that has yet to unwind. For instance, short interest represents nearly 14% of NVDA's total float. And options traders have been unusually put-heavy, per the equity's 10-week put/call volume ratio of 0.72 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- near the top third of its annual range (though some long puts could be of the protective sort). NVDA could also see more love from the brokerage bunch, considering the average 12-month price target sits below current levels, at $98.52.
While these sentiment indicators set up an attractive opportunity for contrarian bulls, it's also a prime time to scoop up premium on NVDA. For one thing, the stock's Schaeffer's Volatility Index (SVI) of 42% is seated in the bottom quartile of all readings from the past year, indicating muted volatility expectations are being priced into the security's short-term options. What's more, NVIDIA Corporation has an SVS of 94 -- meaning the options market has seriously underpriced the stock's ability to make big moves on the charts over the last 12 months.
Turning to ABT, the shares have been off to a strong start is 2017, up 5.7% so far at $40.59. But after a sharp rally, the shares were rejected at the 320-day moving average on Tuesday. ABT has also been the worst performer during the first year of a presidential cycle among all S&P 500 Index (SPX) stocks over the past three instances. Ending positive just one time, the stock has lost 18.6%, on average. Furthering the argument for an ABT pullback in the near-term -- and perhaps explaining today's 1% dip -- the equity's 14-day Relative Strength Index (RSI) reached overbought territory last night, at 72.
Nonetheless, ABT has seen a great deal of optimism lately. Of the 15 analysts tracking the stock, 11 call it a "buy" or better, without a "sell" on the books. And at the ISE, CBOE, and PHLX, the equity's 10-week call/put volume ratio of 3.12 ranks just 10 percentage points from a 12-month peak. Meanwhile, ABT's Schaeffer's put/call open interest ratio (SOIR) of 1.58 is docked at an annual high -- but that doesn't mean near-term traders are bearish. Rather, put selling has been incredibly popular, with roughly 2.9 ABT puts sold for each one bought over the last 10 sessions. This is particularly evident at the stock's near-the-money February 40 put, where data from the major exchanges confirms more than 3,000 contracts were sold to open in recent months, compared to just over 500 purchased.
But it looks like options pricing currently favors buyers of Abbott Laboratories' short-term options. After all, the stock's SVI of 18% ranks in the low 16th percentile of its annual range, pointing to historically low volatility expectations being priced in. Moreover, ABT boasts an SVS of 95, indicated the underlying has outperformed the options market's volatility expectations over the last year.
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