Volatility Trading Digest - Earning Report Trade Ideas
Volatility Trading Digest - Earning Report Trade Ideas
Oracle Corporation (ORCL)
The last earnings report suggestion we made for this enterprise software company in Digest Issue V11 49 was a combination long call spread with a short put. At the time, expectations were more positive, but since they missed on the last report, we will use a different strategy this time based entirely upon the expectation of a decline in implied volatility after the scheduled Q3 report on Tuesday March 20 after the close. Expectations are for 9 billon in revenues, with a consensus earnings estimate of .56 per share and a whisper estimate of .57.
Here is the options data.
The current Historical Volatility is 17.31 and 16.97 using the Parkinson's range method, with an Implied Volatility Index Mean of 29.94, up from 26.03 last week. The IV/HV ratio is 1.73 and 1.76 using the range method to calculate the HV. Friday's put-call ratio was bullish at .52 while the volume was 54,576 contracts traded compared to the 5-day average volume of 72,570 contracts.
Consider this short and long straddle combination using the March 23 weekly options.
Compared to the implied volatility mean index of 29.94 and the historical volatility of 16.97 this straddle has a good implied volatility edge.
Now for the second part,
The combination of both straddles has a net debit of .48 and we expect the implied volatility of the March 23 options to decline substantially while the decline in the April options should be considerably less. We will have the results by the end of week and plan to close it on Friday.
Lululemon Athletica Inc. (LULU)
This Vancouver based company, catering mostly to women, sells expensive yoga and workout clothing along with accessories in 140 stores in Canada, the U.S. and Australia.
Scheduled to report Q4 earnings Thursday March 22 before the opening the consensus estimate is .49 per share with a whisper estimate of .53 per share on 360.3 million in revenues.
Here is the necessary options data.
The current Historical Volatility is 31.37 and 25.73 using the Parkinson's range method, with an Implied Volatility Index Mean of 45.55, up from 44.29 last week. The IV/HV ratio is 1.45 and 1.77 using the range method to calculate the HV. Friday's put-call ratio was a very bullish .40 while the volume was 37,146 contracts traded compared to the 5-day average volume of 20,980 contracts.
Since the stock has risen up from 65 in the last week or so, a better than expected report appears already to be in the price making it vulnerable to a selling off after the release.
Since there is a good implied volatility differential we suggest using the straddle strategy again.
First the March 23 weeklies,
Part 2,
Once again, we expect the implied volatility of the March 23 options to decline substantially after they report earnings while the decline in the April options should be considerably less. This one has a net debit of 2.78 and the plan is to close it on Friday.
KB Home Common Stock (KBH)
With the homebuilder's index in an uptrend here is one to consider on the assumption the trend continues, despite our indicators suggesting a correction is due.
Scheduled to report Q1 earnings Friday March 23 before the opening the consensus estimate is for a loss of .23 per share, but less than last year.
Here is the options data.
The current Historical Volatility is 61.83 and 46.53 using the Parkinson's range method, with an Implied Volatility Index Mean of 64.28, up from 60.66 last week. The IV/HV ratio is 1.04 and 1.38 using the range method to calculate the HV. Friday's put-call ratio was a very bullish .20 while the volume was 16,742 contracts traded compared to the 5-day average volume of 10,330 contracts.
For this one we suggest a put sale.
Short of a major market correction, we think the chances are good that the upward sloping trendline now at 11.25 will hold, but be prepared to take the stock by assignment if it closes below 11 on the April expiration.
High IV/HV Ratio
McMoRan Exploration Company (MMR)
McMoRan is one we have suggested several times in the past that always seems to disappoint, but always seems to stay in the same range while maintaining high options implied volatility. Their exploration work in the shallow water ultra deep Gulf of Mexico has attracted the attention of Chevron and in recent months resulted in a partnership offer on the Lineham well and McMoRan agreed. It is significant that giant Chevron wanted MMR to join it in this project as an equal partner. They are close to testing/producing the first of many wells that are pushing very significant technological boundaries.
We think expected test results could be the motivation of the increase in option prices reflected by the high IV/HV ratio.
Here are the relevant option numbers.
The current Historical Volatility is 39.35 and 37.49 using the Parkinson's range method, with an Implied Volatility Index Mean of 109.11, up from 113.04 last week. The IV/HV ratio is 2.77 and 2.91 using the range method to calculate the HV. Friday's put-call ratio was a bearish at 1.55, most likely due to hedging activity, while the volume was 33,019 contracts traded compared to the 5-day average volume of 23, 770 contracts.
For this one we suggest a strategy that can benefit if they report blowout test results that some have been expecting for a long time from the ultra deep shallow Gulf of Mexico.
The implied volatility edge is in the short April 12 put and if it closes below 12, on the April expiration be prepared to take the stock by assignment and then sell calls against the long stock, as the implied volatility will most likely remain attractive.
All of the suggestions above are based upon last Friday's closing prices using the mid price between the bid and ask. On Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change. To follow the progress of the suggestions we will book the trades using the closing mid prices on Monday.
About Ivolatility
IVolatility.com is based upon the concept of providing affordable options analytics over the internet. We provide options volatility data arranged and interpreted in a manner that creates predictive qualities. Over the years we evolved into the premier provider of analytics, tools and data all delivered over the internet. IVolatility.com clients are represented in all segments of the global derivatives market. More than half of the top 30 options market makers and US options brokers use IVolatility.com financial data services. In addition, IVolatility.com clients include 3 out of 5 of the largest US banking institutions and more than half of the top 50 investment banks. We offer solutions at every level, from beginner to expert professionals at institutional firms and hedge funds.
View Ivolatility's post archive >
