How to Play TiVo Ahead of Earnings

TiVo Inc. (NASDAQ:TIVO) is scheduled to report a negative $0.11 EPS on modest revenue of $64.78 million. In the near-term, TiVo will confront rising R&D costs necessitated by a broadening competitive landscape. The company is also facing a number of patent litigation issues which could threaten its recurring revenue stream in the long term.  

 

In spite of these obstacles, many investors have been quite bullish based on improving revenue, new partnerships, and opportunities for international expansion. I believe this sentiment has fueled an irrational run-up in the share price, and a pullback is in order.

 

TIVO has sold off five of the last eight quarters on earnings, and I think the stock has moved too far too fast.  I want to get short TIVO, but I always want to set up a good risk vs. reward setup. As we look, the stock has also sold off four of the last five quarters. 

 

11/29/12     $10.85     $11.54     $+0.69 (6.4%)

08/30/12     $9.36       $9.04       $-0.32 (-3.4%)

05/31/12     $8.96       $8.54       $-0.42 (-4.7%)

02/24/12     $12.00     $11.61     $-0.39 (-3.2%)

11/23/11     $9.57        $9.38       $-0.19 (-2.0%)

08/25/11     $8.12        $9.50       $+1.38 (17.0%)

05/25/11     $9.41        $10.16     $+0.75 (8.0%)

03/02/11     $9.82        $8.93       $-0.89 (-9.1%)

Historical Earnings Move: Mean 6.7%, Median 5.5%

 

My Trade:  Selling the TIVO March 12-13 Bear Call Spread for $.50

Risk: $50 per 1 lot

Reward: $50 per 1 lot

Breakeven: $12.50

 

Greeks of the This Trade:
 

Delta: Short

Gamma: Short

Theta: Long

Vega: Short