Tag: Earnings
Why Alcoa Should Be Your Best Friend (AA, SPY) 1.9.2013
The lack of volatility and the underwhelming nature of Alcoa has really prevented AA from being an interesting event, but this is exactly why AA earnings is an excellent event to trade. KOTM looked back at the last seven earnings reports from AA and found something interesting. If a trader sold the weekly straddle in AA the day before the earnings report the last seven time times, the total return would have been an impressive 18%! Not bad for just seven trades.
This exercise is simply taking advantage of the underwhelming nature of Alcoa, but clearly this is not a free 18%. The risks to the short straddle are unlimited, for the stock could blow through the short call and move up to infinity; in theory. While Alcoa moving up to $13, no less infinity, in the short term is highly improbable, it is still a risk to the trade and should be noted.
Either way, the data from this little exercise is interesting. The prevailing market media manufactured norm has become a reality, but this does not mean that one should ignore potential catalysts…large or small.
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S&P Emini & Earnings Recap 12.5.2012
Max Out the Credit Card on Visa Volatility? 10.31.12
Visa has turned itself into a solid stock since its IPO in late 2008. V opened at $59.50 and is trading around $138 now… returning a cool 133%. The ride has been anything but steady however, the crash of 2008 and numerous regulation attempts have shaken some out of the trade, but the question remains…is IV too cheap for the week of a major catalyst like earnings?
Should one subscribe to history, the straddle has not been a profitable trade during earnings. As seen in the excel sheet below, buying the ‘at the money’ (ATM) straddle has been a loser five of the last six times…six observations because weekly options were not available prior to 5/5/11 before earnings. It is important to point out that the IV during these trades were all in line with the average, but now the IV is outside minus two standard deviations of the mean or 97.51% of the observations are above it. It may not be a prudent strategy to fade such low premium, as one may be selling into a hole. Fading the straddle is a popular trade among ‘gun slingers’, but the key variable in options, being implied volatility, may persuade one to think again…and maybe flip it as a long trade.
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Don’t Google for Profits, Just Read This: Pregame GOOG Earnings From Every Angle (GOOG, GOOSY, SPY, QQQ) 10.18.2012
The first graphic is a daily bar chart of price’s reaction to the past nine earnings announcements from GOOG. Action after the event is mixed; in most of the sample set, six of the nine observations, GOOG gapped and pinned on expiration (red vertical line). In the other observations, GOOG gapped, but then filled or reversed into said gap. This is indicative of efficient markets and random walk…for each observation is unique and independent of past price action. The gap is price’s way of adjusting to new news. While this gap may seem inefficient, the derivatives market, in most cases, was expecting said move.
Now to what is implied for the coming event, because the GOOG October options only have two days until expiration, they will be an organic way to derive what is implied for the event today after the close. Using the KOTM implied volatility & time based model, we calculated the one-sigma move (68% probability within) to be roughly $44.17 up/down or about 68% chance we settle between $799.67 and $711.31 by the close on Friday. The two sigma move (95% probability within) is $88.35 either way or $843.85 & $667.13. On Wednesday, October 17th 2012, the stock had a 1.5% pop while the market was only up 0.5%…1% alpha (we will touch on GOOSY alpha options later). The implied volatility curve (IV being a measure of risk, supply and demand, relative price, and an input into theoretical models) is displayed below, for it is important to know, especially if one is trading two different months in a spread.
The following chart includes the one and two sigma rolling probability cone, volume profile, and major moving averages (50, 100, 150, & 200). While the chart may seem noisy, it sure does tell us a lot if you listen! GOOG broke out of its June-July range on 7/5/12 and has yet to seriously look back. The recent pullback tested the trend line and 23.6% Fibonacci retracement level. Other than little support levels like prior lows, the next serious support level is the 50-day moving average at $710. On expiration Friday the 50-day will sit at the lower end of the two-sigma rolling probability level. The rolling probability levels and the KOTM probability levels differ for inputs like IV were not the same. The rolling used a lower IV, an average of the whole IV curve, which says there is a 2.5% chance we test the 50-day by expiration Friday (nearest red vertical line) vs the KOTM probability of 16% we test the 50-day by expiration Friday. The KOTM model is only used for the next two days, for it would not be appropriate to input 80% IV over the long term, as this one is only used before an earnings announcement. Additionally, we are currently sitting at the point of control on the upper, yet small, distribution. The other moving averages sit about 15% below us.
The ATM (at the money) front month $755 straddle (lifting the offer) is at about $39.50 (5.2% of stock). Because deltas move to one faster near expiration, it is easy to calculate break evens on the straddle; $715.75 & $794.25… IV crush, large gamma, and time decay. It is vital to note that given the ATM straddle, it is estimated that GOOG will need to expire one standard deviation away from where we are now, or move + or – $44, either way, just to make about 10% on the trade (using the KOTM sigma model).
IV is actually cheap however, historically speaking, given the average is 102% and Wednesday closed at 79%. The average % move and net change are about 7% & $40 respectively…see excel sheet for all data. Considering GOOG’s price, the ATM straddle will cost about $4,000. This is where the GOOSY will come in handy, while this is not a pure GOOG play, (see link below for alpha options explanation), it does lower the relative cost. The $88 ATM GOOSY straddle is about $4.10, about 4.6% of that product, and only $410 per one lot!
Alpha options explained here LINK
http://www.keeneonthemarket.com/blog/1562-goog-aapl-spy-alpha-option-review-avspy-a-goosy-10172012
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Data courtesy of Thinkorswim
Will Big Blue Bleed Red on Earnings or IBM @ $280 by 2015? 10.16.2012
The next catalyst is their earnings announcement today!
For a complete review of what the options market, charts, statistics, and history are implying for IBM today see the link below for it is very important to know every angle.
LINK HERE
http://www.keeneonthemarket.com/blog/1551-pregame-ibm-earnings-from-every-angle-ibm-qqq-10152012
The analyst community has an average price target of $219 on IBM and many analysts are expecting about $3.61 in EPS. Credit Suisse, who has a neutral on the stock, recently adjusted their Q3 2012 EPS to $3.69, they go on to note that IBM will face tough times bringing revenue back up to par, but also noted their migration to higher margin businesses that compensate for said headwinds. Credit Suisse later went on to state that IBM is actually more or less a defensive type of stock, for it will get 50% of their incremental EPS from M&A and buybacks over the next five years. While this is not the most shareholder friendly or organic way to grow it still boosts the bottom line and hopefully shareholder value.
IBM will benefit from the mainframe refresh cycle for they have been expanding their mainframe ecosystem as they have been growing inorganically, for example in the software services and cloud space. This cycle is where IBM is sensitive to macro events and trends. The mainframe cycle is expected to be weak and damper the announcement today. Credit Suisse expects systems & technology revenues to be $3.98bn (-11% YoY) in the quarter; which may be confirming IBM’s recent focus shift into other businesses. Meanwhile, software is going to be increasingly important for IBM. Their $3.5bn in acquisitions need to prove their value and boost growth. Analysts are expecting software revenues to be up mid single digits YoY.
The analyst community has 13 overweighs, 19 holds, and zero sells currently. The median PE for next year is 12.3, below the market, but next year IBM has about $16 in forecasted EPS, implying about a $192 price, below where we are now.
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Morning Rage 10.10.2012
Alcoa is down twelve cents in pre-market trading today. Dow Futures are down twenty-two and S&P futures are down three quarters of a point. Crude futures are down a quarter of a point and gold futures are up one half of a point.
Earnings movement will continue today with Costco (COST), up almost 3% in pre-market trading. Net sales in the fourth quarter were up 14% from fourth quarter of the year before, with same store sales up 5%. Profits increased by 27% from the previous quarter. Yum! Brands (YUM) announced beating third quarter estimates, up about 23% from the same period last year. The stock is higher by about 4.7%.
Economic reports today include MBA purchase application, which measures new applications at mortgage lenders. Also, US treasury budget report around 2:00pm EST, which can be a predictor of future fiscal policy. The report measures the surplus or deficit of the federal government.
Morning Rage 10.9.2012
Dow futures are up seventeen and S&P futures are up two and a half. Gold futures have moved nine-tenths of a point climbing back over ninety. Metal futures, gold, silver, platinum, are slightly positive before the market opens.
Alcoa Inc. is scheduled to release its earnings report after the bell today. Alcoa produces and manages aluminum and alumina. The company mines bauxite, which is then rolled into alumina. They also produce and sell titanium and other alloy products.
Alcoa stock ($AA) is up 5.43% since January, with a 52-week low of $7.97 and a high of $11.66. The stock recently hit its ten-day high and put/call ratio is currently 0.85. Earnings have rebounded from three straight misses in 2011 and negative earnings in Q4 to beat earnings in Q1 2012. The projected earnings are $0.06, down $0.04 from the previous quarter. Quarterly revenue has been on a slight decline since Q2 2011 and are projected to be 1.7 Billion less this year than the previous year.
Alex has a master’s in economics from Suffolk University.
Questions, comments, or suggestions welcome at alexk@keeneonthemarket.com
Associate Option Battle 10.2.2012
Associate Jim
Trade: Buying 40 FDO Oct 60- 57.5 Put Spread for $0.25
Risk: $25 per 1 lot
Reward: $225 per 1 lot
Breakeven: $59.75
Notes: The stock has sold off hard twice in the past four quarters both after beating estimates. The stock has been rallying but I think it will test lower after earnings.
Associate Alex
Trade: Buying 4FDO strangle swap by buying the Nov 62.50 Put – 67.50 Call strangle and selling the Oct 62.50 Put – 67.50 Call strangle for a net debit of $2.45
Risk: $245 per 1 lot
Reward: Unlimited
Notes: I expect the stock to stay within the strangle till October expiration, making the strangle worthless, and then to continue the direction further into November.
Alex has a master’s in economics from Suffolk U.
Jim has B.S. in finance from University of Illinois Champaign-Urbana.
Pregame MOS Earnings From Every Angle 10.1.2012
They will announce October 2nd 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 2nd. 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 5th. On Thursday, September 25th 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.
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