Tuesday, April 13, 2010

Intel (INTC) - Earnings Preview with Option Trades

INTC is trading 22.54 - with earnings today AMC. The LIVEVOL™ Pro Summary is below.

A simple trading strategy is examined, but first some summary stuff...

The company has traded past its daily average in the first two hours (128,500 vs. 117,100). Calls have traded 2:1 to puts - but there hasn't been a strong directional bias from what I can see today. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that the Apr ATM options are trading the heaviest (no surprise) with the Apr 23 calls trading nearly 30,000 on over 83,000 OI.

The Skew Tab snaps can behelpful to look at for a visual illustration of the vol rise and crash. The Skew for today first (click to enlarge):

Note how much higher the red month (front) is than the rest. Next I have included (click to enlarge) the Skew tab snaps from 1-13-2010 (one before last earnings) and 1-15-2010 (the day after earnings). You can clearly see where front month vol is "probably" heading tomorrow.

Now just becasue vol crushes after earnings - DOES NOT mean it's an automatic sale. Vol can go down and a stock can move huge. In fact, that's more the rule than the exception. Vol goes down b/c news is out - but stock moves size due to the news.

I took a look at a simple strategy with INTC - sell the second month straddle the day of earnings and buy it back the next day no matter what. I used close to close values - i.e. sell the straddle at theoretical fair value (mid-market) right at the close then buy it back the next day right at the close. Since INTC has penny wide markets - the slippage is minimal i.e. fair value is sort of realistic. You can see what I found below.

In 7 out of the last 8 earnings cycles, that strategy was a winner. Max gain was 26% in one day, max loss was 37%. The gains other than the outlier were actually in a tight range: 13%-20%. The loss was the largest absolute move. In all, the move generated 10% average daily returns ex-commissions and slippage.

Of course, if the strategy loses 37% again this cycle, then the strategy in total is barely a winner - and barely a winner for shorting earnings straddles doesn't like much fun to me in terms of risk:reward.

Another BIG thing to keep in mind - checking out the Options Tab (above) you can see the May 23 starddle is priced at 27 vol. That's the lowest second month vol one day pre-earnings in the last 8 cycles (from what I see). So, basically... a vol sale looks less tastey...

(1) I tried to be careful with my calculations but they aren't guaranteed! Use your Livevol Pro and verify, verify, verify...

(2) This is trade analysis, not a recommendation!

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