Friday, April 16, 2010

VMware (VMW) - Earnings Preview; Front Spread

Correction. Earnings are scheduled for Tuesday AMC, not Monday as I originally posted.

VMW is trading 56.46. The LIVEVOL™ Pro Summary is below.

Earnings are scheduled for Tuesday AMC (after market close). I'll follow the same type of analysis I did for FDO and INTC. For those new to the blog - you can catch up here:
FDO Earnings Blog
INTC Earnings Blog

VMW seems to be another where a front spread has worked out nicely 7/8 times and the one where it failed was a small loss relative to the gains. The stats for selling the front month straddle on the close the day of earnings and buying back the close the day after (one day later) are below.

Pretty cool results. The Earnings & Dividends Tab snapshots for the last seven earnings cycles are included (click to enlarge).

What we're lookin' at:
(1) The top ROW is VMW stock price 5 trading days before earnings through 5 trading days after.

(2) The second ROW are the front 2 month ATM straddles for the same period - focus on purple.

(3) The third ROW is the implied vol for those straddles - focus on the red - the front month. NOTE: The red line always collapses after earnings - this is called the vol crush after earnings.

A major difference this earnings than last - the IV of the straddle is just 43. Last few earnings it's been 52-60 (i.e. substantially higher). The IV may pop a bit on Monday as that is the final day to trade before earnings, so we'll see. For what it's worth, the 60 IV cycle was actually the loser.

One last thing about VMW - This is a $55 stock - so a "big move" here can be much more painful than say INTC trading at $24 if you're short the straddle. The same thing goes for AAPL (coming soon) and GOOG (you can read that one HERE.)

This is trade analysis, not a recommendation.

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