Option Market: Red Hat Inc Risk Hits A Depressed Level

Red Hat Inc (NYSE:RHT) Risk Hits A Depressed Level

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We're going to look at a proprietary risk rating for the next 30-days built by Capital Market Laboratories (CMLviz) based on a large number of interactions of data points, many of which come directly from the option market for Red Hat Inc (NYSE:RHT) .

In the "Why This Matters" section at the end of this article on Red Hat Inc (NYSE:RHT) we're going to take a step back and show in great specificity that there is actually a lot less "luck" in successful option trading than many people know. The whole concept of an "option trading expert" is vastly over complicated and we'll talk about how superior returns are earned.

But first, let's turn back to RHT and the company's risk rating:

We also take a peek at the implied vol for the Technology ETF (XLK), our broad based proxy for RHT.

S&P 500 IV30     9.88%
Nasdaq 100 IV30     10.73%
XLK IV30     10.9%

RHT HV 30     13.89%
RHT Current IV30     32.03%
52 Week Low IV30     19.85%
52 Week High IV30     43.71%

The risk as reflected by the option market has hit a depressed level relative to the company's past. The option market reflects a 95% confidence interval stock price range of ($76.30, $88.30) within the next 30 calendar days.

While the option market risk rating is on the low side, we note that companies in this situation are still susceptible to sudden stock move risk, it's simply the probability of that large stock move is depressed. Buyers of options and volatility may find these prices more attractive than at other times.

The IV30® is the risk reflected by the option market in the stock price for the next 30 calendar days -- it's forward looking. Red Hat Inc shows an IV30 of 32.0%, which is a depressed level for the company relative to its past.

The option market for RHT has shown an IV30 annual low of 19.9% and an annual high of 43.7%, meaning that RHT is at the 51% percentile right now. Here's a table of the data before we dig into the risk rating further.

Current IV30    
Low IV30    
High IV30   
32.0% 19.9% 43.7%

The option market reflects more risk in the next 30 calendar days for Red Hat Inc (NYSE:RHT) than on average.
Further, if we look backwards, the stock has a realized 30-day historical volatility, called the HV30, of 13.89%.

We have a situation now where not only is the IV30 elevated relative to the past, but the option market reflects the likelihood of yet more stock movement in the next 30-days than it has in the last 30-days. Let's turn to a chart to see what's going on.
Note how much higher the forward looking risk for Red Hat Inc is priced (32.0%) compared to what happened just in the last 30-days (13.9%).

Red Hat Inc Risk Rating
The RHT risk rating is at 2, where the rating goes from one (the lowest risk) to five (the highest risk). The driving factors for the 2 rating are:

The IV30 is above the annual average.
The HV30 is below the 20th percentile.
The HV30 is below 30%.
The IV30 is above the HV30.
The stock has moved +8.1% over the last 3-months which does indicate some elevated risk.