AA - Earnings Preview and Vol Trading Pattern

Discussion in 'Options' started by livevol_ophir, Jul 12, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    AA is trading $10.72 with IV30&#8482 up 8.4%.

    <img src="http://1.bp.blogspot.com/_hMry1m7UF10/TDs3a7qkXVI/AAAAAAAADdI/CGlD7jYFo-Q/s1600/aa_summary.gif">

    AA has earnings today after market close (AMC). The ATM straddle in July is worth $0.82 with front month ATM vol at 86. The Options Tab is included (<a href="http://livevol.blogspot.com/2010/07/aa.html">in the article</a>).

    AA has followed a consistent earnings pattern for four out of the last five earnings starting with the 4-7-2009 cycle and ending with the last earnings cycle on 4-12-2010. Specifically, a straddle sale at the close on the day of earnings and a purchase back the day after was a winner each time. The Earnings & Dividends Tab for those cycles is included with the relevant values highlighted (<a href="http://livevol.blogspot.com/2010/07/aa.html">in the article</a>).

    <b>What we're lookin' at:</b>
    (1) The top ROW is AA stock price 5 trading days before earnings through 5 trading days after.
    (2) The second ROW are the front 2 month ATM straddles for the same period - focus on purple - the front month.
    (3) The third ROW is the implied vol for those straddles - focus on the red - the front month. NOTE: The red line always collapses after earnings - this is called the vol crush after earnings.

    The trade statistics for the straddle sale and purchase a day later are included (<a href="http://livevol.blogspot.com/2010/07/aa.html">in the article</a>).

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/TDs5eEwdODI/AAAAAAAADdw/iH_l7CqsM5s/s1600/aa_ed_stats_7-12-10.gif">

    We can see that the one day trade averages a 21% one day return, with the worst day being the 10-7-2009 cycle; a 1% loss. Keep in mind, these trades do NOT include commissions which will have a substantive impact on the results as the average change in value for the straddles is just $0.31.

    It will be interesting to see what AA does this cycle. A couple notable phenomenon:

    1) The $0.82 fair value for the ATM straddle today is the lowest it has ever been in absolute dollar terms.
    2) Options expiration is this Friday, so this is almost a pure earnings play; not a lot of theta to worry about.
    3) Selling the 11 straddle wins max gain if the stock goes up from here. If you want to sell the vol and make a directional bet, sell the straddle where you think the stock is going. i.e. if you think it's going to $10 at expo, sell that straddle instead.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:
  2. There's only been one "large" profit in the data sample to skew the average profit. Maybe AA will "shine" this time. :cool:
  3. livevol_ophir

    livevol_ophir ET Sponsor

    Yeah; and there prob won't be a big profit this time given that's it's only $0.82 straddle.
  4. livevol_ophir

    livevol_ophir ET Sponsor

    Update posted.