Friday, January 21, 2011

Sara Lee (SLE) - Earnings Bet and Vol Scalps

SLE is trading $18.55, up 1.5% with IV30™ up 1.3%. The LIVEVOL® Pro Summary is below.


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I wrote about SLE on 12-8-2010. You can read that post by clicking in the title below:
Sara Lee (SLE) - Vol Rips; Calendar and Skew Scalp On the Board

The vol was up and the upside skew was bid. Today there is more order flow to the upside, this time, very specific to earnings.

The company has traded over 18,000 contracts on total daily average option volume of just 4,826. The action is in the Feb 19 calls (long) and the Jul 20 calls (sales). The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the calls in Feb are not necessarily opening (compare OI to trade size). That interest to me actually looks short, so the OI should dip on these trades. The Jul trade volume is well above existing OI, so those look opening.

This Feb/Jul 19/20 call spread cost $0.15, and is interesting because earnings are due out in Feb. IMO, this is a bet on earnings and looks to be closed out after the report as there is also an earnings cycle in May - so the Jul options will likely not be left naked short.

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

We can see the Feb options are priced at higher vol than the other months due to earnings. Buying the Feb and selling the Jul is actually a 15 point reverse vol scalp (i.e. buying substantially higher vol than it sells). This phenomenon also leads me to be believe that this is an earnings bet. The lingering caveat is that the OI is short, so maybe this is a close in Feb to get short the juice in July. But the vol levels make that bet seem a bit weird to me.

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 that SLE stock can gap on earnings and on other news. Check out the bottom portion of the chart where the IV30™ is elevated to the historical realized vols by a pretty large amount. Buying 32 vol in Feb feels really expensive.

Possible Trades to Analyze
1. Calendar Spread the elevated Feb (earnings vol):
Not my favorite approach of all time to sell earnings vol, but the vol difference is pretty large.
Buy the Feb/Apr 19 call spread for $0.20.
NB: Apr has a dividend.

2. Calendar Spread Feb and buy some deltas:
2a. Sell the Feb 20 calls @ $0.20.
Buy the Apr 19 calls for $0.65.
Pay $0.45 to copy the order flow directionally, but own the back month vol instead of the other way around.
NB: Apr has a dividend.

2b. Sell the Feb 20 calls @ $0.20.
Buy the Jul 19 calls for $0.75.
This only costs $0.10 more and gets you two earnings cycles. This is my fav trade here for anyone that is bullish SLE, though the April one is nice too. Note that the Feb/Jul call spread has a MaxGain:MaxLoss > 1:1 if there is a large move during the Feb cycle (i.e. off of earnings).
NB: Apr and possibly July have dividends.

This is trade analysis, not a recommendation.

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