Tuesday, February 15, 2011

DELL - Earnings Preview & Patterns

DELL is trading $13.84, down 1.8% with IV30™ up 6.5%. The LIVEVOL® Pro Summary is below.


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DELL has earnings today AMC. Thse earnings stocks on expo week are always fun as the front month becomes pure earings vol.

Let's start with some earnings stats from the last eight quarters. This analysis is available in Livevol Excel Premium.

So for 7/8 of the last earnings cycles, the one day ATM straddle sale and purchase back the next day was a winner. The average absolute one day stock move is ~$0.56, with a $1.58 and a $0.03 move as outliers.

Let's look to the Skew Tab.

Ok, so the vol is elevated in the front due to earnings and expo approaching. The second and third months have pretty nice skew shapes -- normal (ish). Let's look to the Charts Tab: the top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see on the vol portion that the IV30™ has risen (as expected) into earnings. However, the last two cycles IV30™ was ~46 and ~41 respectively while today we see an IV30™ just above 37. So, in English, the vol isn't as high this earnings cycle as previous.

Just a quick note here, this is a great demonstration of the value of IV30™ -- a vol index that has a constant expiration length allowing us to compare events across time.

Finally, let's look to the Options Tab.

Possible Trades to Analyze
I like that DELL has a fairly muted move off of earnings, but the relatively lower vol this time makes a sale less attractive. But, never fear, lower vol means a purchase is more attractive.

1. Calendar Spread the upside skew:
Buy the Feb/Mar 15 call spread for $0.12.
The bet here is that DELL moves up on earnings, but not passed $15.

2. Calendar Spread the downside skew:
Buy the Feb/Mar 13 put spread for $0.16.
The bet here is that DELL moves down on earnings, but not passed $13.

3. Buy the vol in March:
Buy the Mar 14 straddle for $1.20 (~37 vol).

4. #3 with a twist:
Add a short Feb 13/15 strangle @ $0.21 (~85 vol).
This is tricky b/c $0.21 feels pretty small to be selling an earnings strangle -- it's just an idea I'm throwing out there. The 50 or so vol point scalp is not really the focus here as Feb has turned into a single event: earnings.

This is trade analysis, not a recommendation.

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