Given the recently choppy action in the broader equities market, options traders might find it challenging to pinpoint the types of strongly trending stocks that lend themselves so well to premium-buying strategies. And given the higher-volatility environment of late, it’s not always easy to find fairly priced options, either.
However, utility stock NRG Energy (NRG) is worth a look for those in search of call option trading ideas. NRG recently popped up on a screen run by Schaeffer’s Senior Quantitative Analyst Rocky White, which filters for equities trading near 52-week highs with relatively low implied volatility (IV) priced into their near-term options.
Specifically, the Schaeffer’s Volatility Index (SVI) for NRG stands at just 32%, in the 6th percentile of its annual range. This means NRG’s front-month options have priced in lower volatility only 6% of the time during the past year — or, to put it even more plainly, April-dated calls on the power company’s stock are extremely cheap.
In fact, IV on NRG options remains at those same tame levels through the weekly 4/27 expiration series, then pops higher for the weekly 5/4 expiration (simultaneously with the expected first-quarter earnings report).
From a technical perspective, NRG touched an annual high of $31.14 back on March 27, and has since been consolidating some gains around that level. Throughout this process, despite shocks to the broader stock market, NRG shares have found support in the $29.50 area — home to the November and January peaks.
Following this sideways shuffle around the round $30 region, we could see another break higher from NRG. The equity’s Bollinger Bands (based on a 6-day moving average — one of our preferred short-term technical indicators) are starting to pinch rather tightly, which often precedes a high-volatility directional move.
A jump in the share price would follow historical precedent, too. White’s data shows that the last time NRG flashed this low volatility/high stock price signal, the equity was trading 3.64% higher a month later.
And finally, it’s worth pointing out that NRG has tended to reward options buyers handsomely over the past year, as indicated by its Schaeffer’s Volatility Scorecard (SVS) of 91 — near the highest possible reading of 100. This metric compares a stock’s realized volatility over the past year against the IV expectations priced into its options for that time frame, with scores above 50 being assigned to stocks that regularly exceed the options market’s expected volatility.