Tuesday, November 2, 2010

Aetna (AET) - Earnings Preview

AET is trading $30.20, up 1.3% with IV30™ up 7.5% into earnings tomorrow before the bell. The LIVEVOL™ Pro Summary is below.


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The company has traded over 20,000 options on total daily average option volume of just 3,779. Nov has the action with over 6,000 Nov 32 calls and over 5,000 Nov 27 puts trading. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size), puts are ambiguous. It seems to me that both are purchases today.

The Skew Tab snap (below) illustrates the vols by strike by month.

Normal looking skew with front month elevated to the back as expected.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock gap down hard on last earnings. In general AET is actually a reasonable bet to sell the earnings vol and then cover the next day (ATM straddle one day sale). The average IV over the last four cycles according to my calculations was 42.14; today the ATM is priced at ~42.8, so basically, the same place. The strangle buyers (even if it's different people buying the calls and puts) is noticeable in terms of size. I feel like a 1x2 OTM could be worth analyzing, but I'm not in love with selling the straddle naked this time, though a $2.25 straddle is pretty juicy.

This is trade analysis, not a recommendation.

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  1. what do you think about calendar to avoid naked sale? Thanks!

  2. That's ok, but it is long vega and we know tomorrow vol will be down, regardless of where stock is. This is a tough one, though I see a bunch of speads which look reasonable.

  3. can you explain how is this long vega for selling Nov 30 straddle and buying Dec 30 straddle? I lost you here, sorry...

  4. Butterflies are another possibility if you want to sell vol and pick a strike near the money.

  5. Nov 30 line has 0.026 vega
    Dec 30 line has 0.042 vega

  6. Looks like 29/30/31 butterfly has liquidity for $0.10.

  7. yes, I though in terms of volatility only, my bad. I though that if stock remains at 30 tomorrow IV for Nov 30 straddle should go down to 30sh and Dec didn't change much

  8. yeah, unfortunately the earnings vol impacts both months.