Thursday, July 15, 2010

General Electric (GE) - Earnings Preview on Vol Pattern

GE is trading $15.10 with IV30™ up 1.3% today and earnings BMO tomorrow. The LIVEVOL™ Pro Summary is below.

The Options Tab snap (click to enlarge) demonstrates a couple of things:
1) The front month ATM straddle is worth ~$0.57.
2) The front month vol (85) is 50 points above the second month (35) because expo is so close and everything is just earnings vol.

GE has followed a consistent pattern for seven out of the last eight earnings starting with the 10-10-2008 cycle and ending with the last earnings cycle on 4-16-2010. Specifically, a straddle sale at the close on the day of earnings and a purchase back the day after was a winner seven times. Further, five out of the last five times have been winners. 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 GE 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).

The summary stats at the bottom exclude the 10-10-2008 winner and 1-23-2009 loser b/c vol was so different back then. For example, you can see the 101-10-2008 ATM front straddle was worth $3.77 (even though GE was only $20 stock), today it's worth $0.57 with GE trading at $15.10.

We can see the last five earnings cycles the average trade has yielded a 17% one day return.

Again, since expo is Friday, and earnings are Friday morning, this is essentially pure earnings vol in the options. One MAJOR note of caution, the straddle value today is the lowest it's been for more than two years the day before earnings.

This is trade analysis, not a recommendation.

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