Given this week we enter the bulk of earnings season, I will stay away from macro and credit commentary, and instead offer up some ideas and rationale for potential plays on some popular names. I will discuss Schlumberger
(NYSE:SLB) and IBM
(NYSE:IBM) today, Google
(NASDAQ:GOOG) and Chipotle
(NYSE:CMG) tomorrow, and VMware
(NYSE:VMW) and Apple
(NASDAQ:AAPL) on Wednesday. The approach described below can be translated to all sorts of other names of course, but these are some that technically and/or fundamentally “speak” to me at this point.
SLB reports on Friday, July 19, the same day July options expire. I believe there will be weeklies available on Thursday for the following week, and they should carry a full load of implied volatility. But for now I’m going to use the August expiry. From a pure pattern standpoint, price has broken out of a multi-month downtrend line. On a DeMark basis, there’s an active daily TD Sell Setup above TDST Level Up; the Sell Setup bar coincided with a TD Camouflage Down (i.e. “distribution”) bar. I will feel a lot better if the TDST Level Up break is “qualified” sometime this week. Thirty- and 60-day normalized implied volatility, i.e. implied volatility during periods without major catalysts is about 20%. Current August at-the-money options trade right around that, so the impact of earnings on August ivols should be pretty muted. The average 1-day move post earnings going back more than 10 years is 3.5% or $2.70 off of the Friday closing price of $76.84.
Bullish Position :
I have no real interest in playing SLB from the short side because I really can’t make a case for it. On the bullish side I’m considering buying the August 77.50/80/82.50 calls butterfly for $0.50. Assuming no change in implied vols., one week post earnings the position would be profitable if SLB is between $76.50 and $82.85, with peak profitability of 25%-35% between $78 and $80. Max loss is $0.50.
IBM reports on July 17 after the close. The chart is a train wreck, trading near the closing low printed the day after the April earnings release. Daily DeMark counts are equally bearish and TDST Level Down is a whisker away at $191.71. Thirty- and 60-day normalized implied volatility is between 19-21%. IBM already trades weekly expirations and the July 26 weeklies trade at about 29%. The July monthlies, which expire this Friday, trade at ivols of approx. 38%. The average 1-day move post earnings going back more than 10 years is 3.6% or $6.90 off of Friday closing price of $192.07.
1x3x2 July 26 weeklies 190/180/175 puts butterfly for about $1.80. On the open on July 22 (post weekend), assuming a 12% reduction in ivols, the position should be profitable between $172.70 - $190, with peak profitability of 180%-245% with the stock between $182.50-$180. Max loss is premium paid.
If one is inclined to play IBM from the long side, an aggressive approach premised on a post-earnings move within the historical average would consist of a 1x3x2 July 195/200/205 calls butterfly for about $0.25. On the open on July 18, assuming an 18% drop in ivols, the position should be profitable between $192 and $202, with peak profitability of about 13x between $198-$200. Note however that if the stock runs away to the upside, the potential maximum loss would be 2x the premium paid.
Tune in tomorrow for thoughts on GOOG and CMG. Wishing you a profitable earnings season!
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.