AVP Earnings Pattern Unfolds

Discussion in 'Options' started by livevol_ophir, Apr 29, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    AVP is trading 32.89 with earnings BMO tomorrow.

    <img src="http://4.bp.blogspot.com/_hMry1m7UF10/S9mLaBf0uoI/AAAAAAAACG4/hN_6EXuVH8c/s1600/avp_summary.gif">

    This is another one with earnings coming up (tomorrow before the bell) so I looked at the trends (vol). For this one also, it turns out that selling the front month ATM straddle the day before earnings and buying it back the day after has won 5/6 times and one push. But... the one loss was the largest absolute move of all pushing the total pnl to a loss. The stats are included (<a href="http://livevol.blogspot.com/2010/04/avp.html">in the article</a>).

    <img src="http://4.bp.blogspot.com/_hMry1m7UF10/S9mJAEwkfYI/AAAAAAAACGY/X3D_NGN8vVg/s1600/avp_ed-stats.gif">

    There was a massive move in the underlying on 7-30-2008. If we take out the earnings cycle in 7-30-2008 and just look at the most recent six (<a href="http://livevol.blogspot.com/2010/04/avp.html">in the article</a>) - we see 5/5 winners and one push averaging a very nice 23% one day gain (ex-commsions and slippage).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/04/avp.html">in the article</a>) demonstrates the current prices - the ATM front straddle has fair value of ~ $2.60.

    The Earnings & Dividends Tab for the last 7 quarters are included. First the most recent four quarters (3/3 wins with 1 push; in the article):

    What we're lookin' at:

    (1) The top ROW is AVP 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.

    I've highlighted in green the straddle the day before and the day after earnings for each cycle.

    And then the three prior to that (2 wins/1 big loss; in the article).

    This is an interesting one as a huge move is not only possible (it is for all stocks) but actually realized...

    This is trade analysis, not a recommendation.

    Details, prices, vols, straddles here: