Volatility Trading Digest - Quarterly Earnings Report Ideas
Volatility Trading Digest - Quarterly Earnings Report Ideas
Last Thursday Schlumberger (SLB) reported better than expected earnings and provided a more optimistic outlook for 2012. Since Halliburton (HAL) is scheduled to report today before the opening they may confirm the positive 2012 outlook. In that event, here is another earnings idea for the oil service sector.
Baker Hughes (BHI)
BHI supplies wellbore related products, and technology services and systems for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the oil and natural gas industry worldwide.
Now very near to the center of its recent range between 61.90 and 41.91, it could respond similarly to Schlumberger if they report 4Q earning better than expected on Tuesday before the opening. The current consensus estimate is 1.33 per share with a whisper estimate of 1.34 per share.
The current Historical Volatility is 42.30 and 32.03 using the Parkinson's range method, with an Implied Volatility Index Mean of 39.38, down from 41.97 last week. The IV/HV ratio is .93 and 1.23 using the range method to calculate the HV. The put-call ratio at 1.0 is bearish, but understandable since considerable hedging using puts is most likely before the earnings report. Fridayís options volume was 18,687 contracts traded compared to the 5-day average of 13,800.
With an Implied Volatility Index Mean close to the long-term average around 35, we think the options are priced low enough to use a strategy with long more options than short. Accordingly consider this call ratio backspread.
The credit above reflects the purchase of 2 February 52.5 calls at .83 each for 1.68. Since this trade is for the earnings report, the plan is to keep it open in the event the stock quickly advances above 53 or declines below 50. In the event, it is between 50 and 53 at end of the week, it will be closed since there is the risk of losing time premium if the stock does not move.
Apple Inc. (AAPL)
Scheduled to report 1Q earnings on Tuesday after the close the consensus estimate is 10.07 per share with a whisper estimate of 12.18 per share.
The current Historical Volatility is 16.83 and 12.60 using the Parkinson's range method, with an Implied Volatility Index Mean of 32.44, up from 30.24 last week. The IV/HV ratio is 1.93 and 2.58 using the range method to calculate the HV. With a bullish put-call ratio of .58, Fridayís options volume was 565,840 contracts compared to the 5-day average of 317,470.
Since the option are expensive in implied volatility terms we prefer to use a selling strategy, such as a short put, but since this is an high priced stock and we do not want to take the risk of being assigned in the event of a decline we suggest using a calendar spread with the weekly short put option.
Since the January 27 400 put will lose considerable time value over the weekend it should be priced about 3.44 on Monday before considering any price change. The February should decline to 7.00 making the debit 3.56. There is good edge in the sale of the January 27 400 put, as shown above with an implied volatility of 55.25, which is 4.4 times the historical volatility using the range calculation method, while the February is priced near the long- term implied volatility forecast between 25 and 30. Since this is an implied volatility earnings trade, the plan is to close it by the end of the week.
SanDisk Corporation (SNDK)
NAND-based flash data storage card maker is scheduled to report 4Q earnings on Wednesday after the close with a consensus estimate of 1.23 per share and a whisper estimate of 1.34 per share.
The current Historical Volatility is 28.75 and 26.46 using the Parkinson's range method, with an Implied Volatility Index Mean of 41.31, up from 40.61 last week. The IV/HV ratio is 1.44 and 1.56 using the range method to calculate the HV. With a bullish put-call ratio of .50, Fridayís options volume was 21,823 contracts compared to the 5-day average of 26,640.
Since the near term options are priced much higher in implied volatility terms, we again suggest using the January 27 options.
Consider this put sale.
Considering the time value decay over the weekend it should be priced about .61 on Monday before any price change. In the event it closes below 50 on Friday take the stock by assignment and then sell calls against the long stock position.
Netflix, Inc. (NFLX)
Netflix is scheduled to report 4Q earnings on Thursday after the close, with a consensus estimate of .55 per share and a whisper estimate of .59 per share.
The current Historical Volatility is 71.64 and 58.96 using the Parkinson's range method, with an Implied Volatility Index Mean of 88.53, up from 86.30 last week. The IV/HV ratio is 1.24 and 1.50 using the range method to calculate the HV. With a bearish put-call ratio of .75, Friday's options volume was 87,662 contracts compared to the 5-day average of 103,790.
Once again, here is a January 27 put sale.
Due to the time value decay over the weekend, it should be priced about 1.19 on Monday before any price change. In the event it closes below 85 on Friday be prepared to take the stock by assignment and then sell calls against the long stock position.
Southern Copper Corporation (SCCO)
SCCO is scheduled to report 4Q earnings on Friday after the close, with a consensus estimate of .69 per share.
Since Freeport-McMoRan Copper & Gold (FCX) said positive things about the improving copper market last week, we should expect to see a good report from SCCO and with its 8% dividend the stock is likely to continue rising.
The current Historical Volatility is 39.74 and 27.45 using the Parkinson's range method, with an Implied Volatility Index Mean of 31.84, down from 33.54 last week. The IV/HV ratio is .80 and 1.16 using the range method to calculate the HV. With a bullish put-call ratio of .35, Friday's options volume was 5,559 contracts compared to the 5-day average of 6,480.
Since there is less options volume the bid/offer spread is wider, so patience may be needed to open this trade.
In the event it closes below 30 at the March expiration, plan to take the stock by assignment and then sell calls against the long position.
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.
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