Monday, July 12, 2010

Alcoa (AA) - Earnings Preview and Vol Trading Pattern

AA is trading $10.72 with IV30™ up 8.4%. The LIVEVOL™ Pro Summary is below.

AA has earnings today after market close (AMC). The ATM straddle in July is worth $0.82 with front month ATM vol at 86. The Options Tab is included (click to enlarge).

AA has followed a consistent earnings pattern for four out of the last five earnings starting with the 4-7-2009 cycle and ending with the last earnings cycle on 4-12-2010. Specifically, a straddle sale at the close on the day of earnings and a purchase back the day after was a winner each time. The Earnings & Dividends Tab for those cycles is included with the relevant values highlighted (click to enlarge).

What we're lookin' at:
(1) The top ROW is AA 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 - the front month.
(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.

The trade statistics for the straddle sale and purchase a day later are included (click to enlarge).

We can see that the one day trade averages a 21% one day return, with the worst day being the 10-7-2009 cycle; a 1% loss. Keep in mind, these trades do NOT include commissions which will have a substantive impact on the results as the average change in value for the straddles is just $0.31.

It will be interesting to see what AA does this cycle. A couple notable phenomenon:

1) The $0.82 fair value for the ATM straddle today is the lowest it has ever been in absolute dollar terms.
2) Options expiration is this Friday, so this is almost a pure earnings play; not a lot of theta to worry about.
3) Selling the 11 straddle wins max gain if the stock goes up from here. If you want to sell the vol and make a directional bet, sell the straddle where you think the stock is going. i.e. if you think it's going to $10 at expo, sell that straddle instead.

This is trade analysis, not a recommendation.

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