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 Google
(NASDAQ:GOOG) and Chipotle Mexican Grill
(NYSE:CMG) today. Note that yesterday I discussed Schlumberger
(NYSE:SLB) and IBM
(NYSE:IBM) and tomorrow I will talk about VMware
(NYSE:VMW) and Apple
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.
GOOG reports on July 18 after the close. The stock has reached its prior peak while simultaneously printing a daily TD Sell Setup. The pattern shows a pretty classic double bottom with a measured move up to $986. Coincidentally that is also the 123.6% Fibonacci price extension target of the move that began in November 2012. It’s tough to make a bearish technical argument here, but a bullish play is hardly a slam dunk considering GOOG is no stranger to blowups. The average 1-day move post-earnings going back nine years is 6.55% or $60.45 off of Friday closing price of $923.00. Surprise, surprise -- that would take it to $983, just about where all the other targets lie. GOOG already trades weekly expirations and the July 26 weeklies trade at about 34% implied volatilities. Thirty- and 60-day normalized implied volatility, i.e. implied volatility during periods without major catalysts, is about 24%.
While the technicals are bullish I’m not inclined to pay too much money for upside exposure. Furthermore, the two possible upside scenarios I see are a) a sustained breakout that takes the stock to the $986 area; and b) an immediate after-hours pop to the target zone followed by a drop back down. The pop-and-drop move is not really tradable with options. The first setup can be played relatively cheaply with the July 26 950/985/1020 calls butterfly. As of midday Monday it was trading for about a $5.15 debit. On the open on July 22, assuming an ivol. drop of 13%, the position should be profitable between $940-$1030, with max gains of about 2.3x around $985. Max risk is the paid premium (plus a little bit because the butterfly is not completely symmetrical; there are no 1015 calls available).
Chipotle Mexican Grill
CMG reports on July 18 after the close. Fundamentally I’ve considered this stock a “cult” for a long long time, and the valuation borders on the absurd. The business itself has suffered rotating stumbles in the past several quarters in everything from margins, to same-store sales, to revenues, to EPS. But when dealing with cults, that stuff doesn’t matter. Technically, the stock is a few dollars away from closing the $100 gap-down from last July’s report. Daily DeMark has active TD Sell and Combo Sell indicators, with combo “risk level” at $402. Weekly DeMark also shows an active Combo Sell in place with “risk” level” at $390.68. All in all, if there’s a place for the stock to crack it is right around current prices. The average 1-day move post-earnings going back to 2005 is 8% or $30 off of a price of $385.00. CMG weekly expiration series won’t roll out until Thursday, so the only available options right now (aside from July monthlies) are the August ones; those trade at about 35% implied volatilities vs. normalized ivol of about 30%.
It’s just as well that I can’t trade the weeklies because the scenario I’m interested in playing is a sharp sustained move down. Given the technical setup – somewhat binary in the sense that it could break out or break down – I view the meat of a downside move between a break of recent trend line support at $355 and the 50% retracement of the move from October to now, at $311. The latter price also jives with the 1-day post-earnings average move, should the move be to the downside. An August 355/310/265 puts butterfly costs about $4.50 and, assuming a return to 30% ivol, by Jul 25 would be profitable between $245-$373, with max gains of about 4x if the stock is between $300-$315. Max loss is the premium paid, but needless to say, if the stock breaks to the upside, and you factor in the 10% short interest, the premium will get smoked with little chance to recoup it. If not inclined to risk $4.50, a “cutesier” play would be to buy an August / July 310 puts calendar spread for about $0.60. This is a lottery ticket with about 10x potential if the stock tanks to the $302-$318 range, and risk is still the premium paid. Thinking out loud, an even more attractive “calendar spread” may be available Thursday morning when the July 26 series starts trading. As in the prior case, a move up in the stock would wipe out the position. So in both instances make sure to size accordingly.
Tune in tomorrow for thoughts on VMware and Apple. Wishing you a profitable earnings season!
Position in AAPL
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