Monday, January 31, 2011

McKesson (MCK) - Repeated Earnings Bet on Day of News

MCK is trading $74.50, up 0.5% with IV30™ up 11.9%. The LIVEVOL™ Pro Summary is below.


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McKesson Corporation (McKesson) provides medicines, pharmaceutical supplies, information and care management products and services across the healthcare industry.

I think of this company as the little giant - a nearly $20 billion company that gets no pub... Sup with that?...

The company has earnings AMC today. It has traded over 10,000 options in the first four hours on total daily average option volume of just 1,204. Calls have traded nearly 2:1 to puts, with 6,100 Feb 75 calls 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). When looking down the entire option chain for MCK, I don't see any OI larger than 1,700, so the Feb 75 action is very large. The trades look like substantially purchases. The next most active line is the Feb 72.5 puts. These look two-sided to me but possibly more sales than purchases.

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

We can see the front month is elevated to the back, as it should be with earnings due out today. A bit odd is that the upside isn't bent up. In fact, if anything, the Feb 75 line kind of looks depressed. Odd...

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).

The implied tends to trade over the short-term historical for the last few months. That vol difference now has really opened up with earnings vol. On the last earnings cycle (10-27-2010), MCK gapped up $3.50 (ish). The bet today is interesting because it's an expensive one. The buyer took a position on the ATM earnings calls - very gamma rich (as opposed to maybe the OTM calls). It is worth to note that this company only has 75 and 80 calls listed - nothing in between (like 77.5) to the upside.

Other than pure earnings bets, I don't see any obvious trades here - the skew looks too well behaved. I would have preferred a kink somewhere. It will be interesting to see if this order flow is right, though. Make a mental note if it is b/c last cycle the ATM calls were the most active right before earnings and well... ya know...

This is trade analysis, not a recommendation.

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