Garmin: A Volatility Squeeze Strategy That Paid Off

| About: Garmin Ltd. (GRMN)

One successful strategy I use to find opportunities is a volatility squeeze set up. A volatility squeeze is simply a period where price reduces to a very narrow range. For longer term traders (like me), I look at such squeeze opportunities on daily/weekly charts. But short term traders would look for these on intraday charts as well.

I consider the squeeze a signal that the stock is 'fixing to get ready' to do something. It is not always easy (for me anyway!) to know exactly which way it is going to break. To increase my odds on a position in which I'm expecting a positive break out, I look for some supportive merits such as

  • Good fundamentals but currently undiscovered
  • A short interest north of 10% (the higher the better)

Garmin (NASDAQ:GRMN) kept showing up on my volatility screenings in April. Here's the chart with the volatility squeeze highlighted in cyan--I thought it a chart with some potential (click charts to expand):


In doing a little more research, I noted that the short interest was very high (north of 15%). To my eye, GRMN had a nice chart set up accompanying the volatility squeeze, and it had a listing boat of bears. I thought that there might be a decent chance of a positive surprise. Accordingly, I elected to take a small position via May $34 calls.

I want to share with you a longer term time frame chart--a weekly chart beginning in May 2008:

The yellow highlight shows the price consolidation along the volume at price bars. To be sure, if there were bad news, there was little in the way of price support below--so the bears would have been feasting on salmon.

Garmin reported earnings today, which you can read about here. The bears had to scramble and no doubt many buy stops were triggered that sent the stock up as high as $36.42 today on 4.3 x average volume. I sold my calls into that buying frenzy--getting something squarely between the low and the high of the day.

Here's a 30 minute chart to show the volume and price explosion.

I will leave it to another to discuss the fundamentals of GRMN; however, I wanted to share with you this speculative strategy that I deploy from time to time with very good results. However, I should note that my philosophy is that any trade on earnings must be considered speculative and made with money one can afford to lose.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.