They will announce October 2^nd 2012 before the market open, so option trades must be executed by the close on Monday. It is prudent to look at a little bit of MOS earnings history before diving into the options activity, charts, and fundamentals.

Below is a daily candle chart of price’s reaction to the past 6 earnings announcements from MOS. After five of the last six releases, the stock gapped and continued the trend three to six days post the event. One time the stock gapped up and grinded sideways, but otherwise it has trended…a powerful tell for traders.

Now to what is implied for the coming event, because the October options still have about 19 days to trade, it is best to look at the weekly options as an organic way to derive what is implied for the event on the 2^nd. Using an implied volatility & time based model, we calculate the one-sigma move (68% probability within) to be roughly + or -$3.31 and the two-sigma move (95% probability within) about $6.62 either way, by October 5^th. On Thursday, September 25^th 2012, the stock had a solid bear candle…testing the lower end of its recent range from post Q4 earnings. Implied volatility (a measure of risk, supply and demand, relative price, and an input into theoretical models) in the October monthly options rallied up 400 bps from about 30% to 34% IV (implied volatility). Given the pump up in IV, there in now more premium to work with.

The following chart includes the one and two sigma rolling probability cone and a confluence of simple moving averages (50,100, 150 and 200). From a technical prospective, the range from mid July of 2012 to now has been solid horizontal support at $56.60, for it has been tested many times. It is also interesting to note the assemblage of simple moving averages. They will sit just below the lower end of the implied one-sigma range on expiration Friday…strong potential support (see chart).

The ATM (at the money $57.5) weekly straddle (lifting the offer) is at about $2.75 or about $4.8% of MOS. Using a theoretical model, and adjusting time and implied volatility, in order to break even immediately after the event, Wednesday, MOS must move up $2.64 (4.4%) or down $2.82 (-4.7%) to offset the IV crush and time decay. I came to post event weekly IV of 33.5% from looking back at prior releases. The average drop in IV was 31%. It is important to be conservative, for estimating lower IV puts your break evens farther away on a long straddle…planning for the worst, and hoping for the best!

Fundamentally, MOS was recently reiterated as a buy from Citi; looking for $71/share from $66. Citi called for an extended agricultural cycle, after the dramatic droughts across the Midwest destroyed crops. Elsewhere, of the major houses, analysts have 17 buys, 7 holds and zero sells. The median multiple for next year is 10.47 and the average price target is $66.95.

It is important to build a ‘mosaic’ when looking at potential trades. Taking bits and pieces from many indicators, markets, and theories creates a well informed trader.

E-mail the author with any comments, questions, or any inquiry

mark@keeneonthemarket.com