Monday, April 19, 2010

Quest Diagnostics (DGX) - Earnings Preview, Skew Bend with a Bet

DGX is trading 59.39. The company has earnings Wednesday (4-21-2010) before the bell. The LIVEVOL™ Pro Summary is below.

The company has traded over 8,100 options in the first hour and a half on total daily average option volume of just 1,172. All but 230 contracts have been calls for a 34:1 call:put ratio. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) more clearly illustrates where the action is. Jun 65 calls have traded 2000+ times (all opening). May 60 and 65 calls have traded 1,490 and 4,275 times respectively. For all three lines, the trades have been pre-dominantly purchases. The May options have traded less than the open interest (OI).

In order to figure out if the call purchases today are opening new long positions or closing old short positions, I looked at the Level 2 pop-up (click to enlarge). I'll examine the May 60 line, but the results are identical for the May 65.

You can see on 4-6-1020 the OI in the May 60 calls jumped. That means opening orders were made the day prior (4-5-2010). The Time & Sales Tab for those options on that day are included (click to enlarge).

You can see that the largest trades were all purchases on 4-5-2010. This implies the OI is long, and the purchases today are a double down (an increase to OI). On the same day, the OI jumped for the May 65 calls on long positions. In total, the call purchases today in May and June are opening.

With all this call buying we would expect to see the skew bend, and in fact it has significantly. The Skew Tab snap is included (click to enlarge). The 65 level calls (May and June) are highlighted (circled). To read why options skew exists and what it normally looks like you can click here.

Examining the Earnings & Dividends Tab we can see that DGX doesn't follow a strong pattern in terms of buying/selling the one day straddle as profitable strategies unlike some of the other names we've looked at (INTC, VMW). To read the post, "How Pros Trade Earnings Vol" click here.

In this case, there seems to be an obvious bet. Either you believe the order flow and you want to get long into earnings, or you don't believe the order flow and you can sell super elevated upside vol (i.e. elevated both due to earnings and uneven order flow).

Finally, the Charts Tab (1 year) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

I've highlighted the last four earnings. The last one has a substantive gap, the others, kind of muted moves...

This is trade analysis, not a recommendation.

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