Stock Alert: Red Hat Inc Realized Volatility Hits A Tumbling Low




Red Hat Inc (NYSE:RHT) Realized Volatility Hits A Tumbling Low

Date Published:

Stock Alert - But Not What You Might Think
Before we cover the full analysis we make a quick alert here that Red Hat Inc (NYSE:RHT) has seen its stock price move at a rock bottom low level. We'll go through the details below -- but that's the lede -- the stock has been unusally quiet. If there was a post it note to summarize the stock movement in the last 30-days it would likely read "quiet time... too quiet?" The HV20 is 17.15% verus the HV20 of the S&P 500 at 8.56%.



Another bit to this alert of quiet time, which we cover in the article, is that while the historical volatility may be a rock bottom low level, the real question that needs to be answered for option traders is not if the HV20 is low, but rather if the implied volatility that is priced for the next 30-days accuratley reflects what we're about to see in the stock for the next month.

To jump forward and examine if owning or shorting options has been a positive trade in Red Hat Inc, you can go here: Getting serious about option trading.

PREFACE
This is a proprietary realized volatility rating created by Capital Market Laboratories (CMLviz) based on a large number of data interactions for Red Hat Inc (NYSE:RHT) . We examine the little used gem of daily stock volatility over a 20-day and 30-day trading period, as well as comparisons to the last year and the actual stock returns over the last three- and six-months and the S&P 500 and Nasdaq 100 indices.

As a heads up, 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 really clearly that there is actually a lot less "luck" in successful option trading than most people are aware of. This idea of an "option trading expert" is vastly over complicated so those with the information advantage can continue to profit at the expense of the rest.

But before that, let's turn back to RHT. Here are the exact steps that led us to this rating, and whether it's a risk alert or a holding pattern.

RHT Recent Realized Volatility


Rating
Realized volatility using proprietary measures has hit a rock bottom low level.

Note
Even though Red Hat Inc generates substantial revenue and is a largeer mid cap, just the fact that it is technology company makes RHT susceptible to excessive risk. Here is a rolling annual volatility chart of the biotech index (IBB) versus the Nasdaq 100 and the S&P 500. Note how elevated the technology sector volatility is (the yellow curve) relative to the S&P 500.



While stocks with RHT's profile see a short-term quiet period, this is also one of those times when a shake out volatility move could be on the horizon. To that point, we do note that RHT is showing unusally low volatility in the last month relative to its past. Let's take a deep dive into some institutional level volatility measures for Red Hat Inc (NYSE:RHT) .

Red Hat Inc Stock Performance
RHT is up +16.4% over the last three months and up +4.4% over the last six months. The stock price is up +13.9% over the last year. The current stock price is $82.65.

RHT Step 1: Stock Returns
The one-year stock return does not impact the volatility rating since we are looking at a shorter time horizon. However, the rating does examine the 3-month returns and the absolute difference between the 3-month and 6-month returns.

  The 3-month stock return of +16.4% has a small impact on the realized volatility rating for RHT.
  The greater than 10% difference between the 3-month and 6-month stock returns has an impact on the realized volatility rating for RHT.

RHT Step 2: Daily Realized Volatility Level
The HV30® takes the stock's day to day historical volatility over the last 30-days and then annualizes it. The HV20 looks back over just 20-days -- a shorter time period. Here is the breakdown for Red Hat Inc (NYSE:RHT) and how the day-by-day realized historical volatilities have impacted the rating:

  The HV20 of 18.6% is quite low and has a substantial downward impact on RHT's volatility rating.


RHT Step 3: Red Hat Inc HV20 Compared to Indices
* The HV20 for RHT is substantially larger than that for both the S&P 500 and the NASDAQ 100 which raises the volatility rating.

* The HV20 for RHT is substantially larger than that for the Technology ETF (XLK) which raises the volatility rating.

Here is summary data in tabular and chart format.

           RHT
           HV20    
   S&P 500
HV20
   NASDAQ 100
HV20   
   XLK
HV20   
           18.6%    8.56%    8.44%    8.94%

RHT Step 4: Daily Volatility Percentiles and Highs

We also examine the annual high of the HV30 in our rating.
  The 52 week high in HV30 for RHT is 52.3%, which is just high enough to have a small impact on the realized volatility rating.

Here is summary data in tabular and chart format.

           RHT
           HV20    
   RHT
HV30
   RHT
HV30 High   
           18.6%    17.2%    52.3%

Final Realized Volatility Percentile Level: RHT
The final evolution of the volatility rating for Red Hat Inc is a comparison of the HV30 value relative to its past, which is neatly summarized in the percentile -- a scoring mechanism that goes from a low of 1 to a high of 100.

  The HV30 percentile for Red Hat Inc is 14%, which means the stock has seen very low volatility in its price movement relative to its own past and that has a dampening impact on the realized volatility rating.

Red Hat Inc Realized Volatility Percentiles