Options volatility and stock breakouts

04/12/22
  • APD in narrow consolidation after 16% rally off March low
  • Pause occurred as stock returned to long-term technical level
  • Options IV has climbed as the stock has consolidated

While investors may be more concerned with longer-term “macro” themes and traders with shorter-term momentum trends, Air Products and Chemicals (APD) provides an example of how the two often intersect.

Air Products is in the gases (not “gas”) business—supplying everything from argon and oxygen to nitrogen and helium. But it has probably attracted more attention recently for its hydrogen-production capabilities1—an industry that is back in the spotlight amid Europe’s push to cut its reliance on Russian energy by ramping up green-energy alternatives, including hydrogen (see “EU generating clean energy tailwinds?”). The company recently announced it would build a clean hydrogen production facility in Arizona that will be operational in 2023.2

That’s the macro angle. On a shorter-term perspective, APD recently saw its recent upside momentum run into a bit of a brick wall as it entered a support–resistance zone (roughly $246–$257), which has captured several of the stock’s turning points over the past couple of years:

Chart 1: Air Products and Chemicals (APD), 11/12/19–4/11/21. Air Products and Chemicals (APD) price chart. Back in the zone.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


Zooming in on recent price action highlights the APD’s rebound off its mid-March low (the stock’s lowest level since April 2020) and its tight trading range over the past two weeks (less than $8):

Chart 2: Air Products and Chemicals (APD), 1/27/22–4/11/21. Air Products and Chemicals (APD) price chart. IV ticked higher as stock consolidated.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


It also shows implied volatility (IV) has ticked higher during that consolidation. For options traders, IV is often a key factor in deciding whether to buy or sell options, since exceptionally high IV can mean options are potentially overpriced while exceptionally low IV can mean they’re underpriced.

One way traders attempt to determine if IV is relatively high or low is to compare it to historical volatility (HV), which simply measures the stock’s price movement in the recent past. In this case, the fact that IV was above HV could mean the options market was expecting APD to be more volatile in the near future than it has been in the recent past—something that could interest breakout traders.

But aside from the reality that the options market could be wrong, there’s more than one way to gauge whether IV is relatively high or low. For example, APD’s “volatility constellation” shows the IV for APD’s May, June, and September options (solid line) is right around the 30-day average (dashed line):

Chart 3: APD implied volatility constellation, 4/11/22. IV near avg. for most expirations.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


From this perspective, at least, ADP options prices are relatively moderate.

Identifying a trading range and knowing when prices may push out of it—and which direction they’ll take—are very different things. Nonetheless, it can be helpful to monitor volatility levels to find out what the options market may be “saying” about potential movement in the stock.

Market Mover Update: The fossil fuel market started the week with more volatility—in more than one direction. June WTI crude oil futures (CLM2) fell more than 4% intraday to $92.60/barrel, their lowest level since March 17. Meanwhile, May natural gas futures (NGK2) jumped more than 6% intraday to a new contract high of 6.722.

Today’s numbers include (all times ET): NFIB Business Optimism Index (6 a.m.), Consumer Price Index, CPI (8:30 a.m.).

Today’s earnings include: CarMax (KMX), Albertsons (ACI).

 

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1 Barron’s. Buy This Hydrogen Producer Stock. It Can Benefit From a Push Into Clean Energy. 4/1/22.
2 Zack’s. Air Products (APD) to Build Green Liquid Hydrogen Plant. 3/11/22.

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