Wednesday, June 23, 2010

Textron (TXT) - Earnings Straddle Sale

TXT is trading 18.96, down 2% with IV30™ up 3.9%. The LIVEVOL™ Pro Summary is below.

The company has traded over 18,000 options in the first two hours on total daily average option volume of just 5,053. The largest trade, accounting for over 15,500 contracts, was an Aug 19 straddle sale in an earnings month. 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 both the calls and puts are mostly opening (compare OI to trade size). You can also see that Aug vol is higher than the other months as it has earnings (projected), which is a vol event.

Trade Stats
Sell 7,812 Aug 19 calls @ $1.45
Sell 7,812 Aug 19 puts @ $1.35
Net Credit = 7,812 * 100 * ($1.45 + $1.35) = $1,132,741
The straddle makes money in the range ($16.30, $21.70) at expiration.

The 52 wk range for TXT is ($8.51, $25.30). Of course, this trade can make money with decay (or vol decline). My best guess is that this trade looks for the straddle to lose value in a quiet July (and thus time decay) and close the position before earnings ever come out. Why do I think this will be closed pre-earnings release? Hold that thought...

The Skew Tab snap (click to enlarge) illustrates that the Aug 19 vol (highlighted) is higher than the ATM for July and Sep (which makes sense due to earnings).

Finally, the Charts Tab (6 months) 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 a few things. First, note that the IV30™ is below the HV20™ right now. More importantly, I've highlighted the last two earnings cycles on the stock chart. Note for both times, the stock moved hard (down the first time, second the last) and the vol may have been a purchase (IV30™ < HV20™). This is why I'm guessing (it's just that, a guess) the straddle could be closed pre-earnings.

This is trade analysis, not a recommendation.

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