Tuesday, October 18, 2011

Aruba Networks (ARUN) - Elevated Vol, Earnings Patterns

ARUN is trading $23.48, down 1.7% with IV30™ up 6.1%. The LIVEVOL® Pro Summary is below.


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Aruba Networks, Inc. connects local and remote users to corporate information technology (IT) resources via distributed enterprise networks.

This is a vol note, but it surrounds earnings and a company that tends to move more than the implied vol prices. Let's start with the Charts Tab (1 year), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

I've circled the last four earnings releases and the corresponding stock moves. More on that in a sec... On the vol side we can see that the IV30™ pop today has pushed the implied further above the two historical measures. Specifically:

IV30™: 80.77
HV20: 61.19
HV180: 73.16

Let's dig into some earnings stats. Below I have included the stock price and ATM straddle values one day before earnings and the one day after.

We can see the stock has moved on average 11.7% (absolute value -- calcs not shown), and more importantly, the ATM straddle has gained value 6/8 cycles on an average 37.2% one day rise. The last three earnings releases have shown a 23.6%, 99.2% and 71.0% one day increase in that one day straddle.

Let's turn to the Skew Tab.

We can see the Nov option vol is priced above Oct and Jan. Last year ARUN had earnings on 8-26-2010 and then on 11-17-2011. This year, ARUN had earnings on 8-25-2011. Hypothetically that could mean earnings will be announced before the Nov expo cycle (11-19-2011), though it's certainly not a sure thing. The elevated vol in Nov does reflect the expectation that earnings are in fact out in the Nov cycle.

This is an interesting one because while the vol on earnings has been priced too low recently, the overall vol is elevated to the historical measures. Or, in English, the vol is either a purchase or sale. How helpful was that?...

Let's turn to the Options Tab for completeness.

As of right now the ATM Nov straddle is worth ~$4.60 or 19.6% of the $23.48 stock price. Also interesting is the pricing of the wings. The 52 wk range in ARUN stock price is [$16.20, $36.40] but the Nov 14 puts are still worth $0.20 (mid-market). Hypothetically a Nov 14/16 1x2 (sell 2 of the 14 puts against a long 16 put) can be done for a credit and is safe to $12. That doesn't mean it's a do, it just means the vol is priced in for a potential big move again. This stock may be worth watching as earnings approach -- perhaps some other ratios or spreads become tasty.

This is trade analysis, not a recommendation.

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