AVP - Earnings Preview and Trade

Discussion in 'Options' started by livevol_ophir, Jul 28, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    AVP is trading $29.97 with earnings BMO tomorrow.

    <img src="http://1.bp.blogspot.com/_hMry1m7UF10/TFBCMlLk0OI/AAAAAAAADzQ/MnQ6qlwl_7Y/s1600/avp_summary.gif">

    With a nice little win on the BRCM earnings straddle play yesterday and today, we'll try again on AVP. The Options Tab snap (<a href="http://livevol.blogspot.com/2010/07/avp.html">in the article</a>) demonstrates a couple of things:

    1) The front month ATM straddle is worth ~$2.20.
    2) The front month vol (38) is 5 points above the second month (33) due to earnings vol.

    AVP has followed a consistent pattern for six out of the last seven earnings starting with the 10-30-2008 cycle and ending with the last earnings cycle on 4-30-2010. Specifically, a straddle sale at the close on the day of earnings and a purchase back the day after was a winner six times and breakeven once. The Earnings & Dividends Tab for those cycles is included with the relevant values highlighted (<a href="http://livevol.blogspot.com/2010/07/avp.html">in the article</a>).

    <b>What we're lookin' at:</b>
    (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.

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

    We can see the average win is 23% in one day. One BIG note of caution, though it isn't shown here, on the 7-30-2008 cycle (right before all hell broke loose), the straddle went from $3.60 the day before to $9.60 the day after on a huge earnings move. That's a 162% loss in one day.

    If you want to try this strategy, I think an Aug 33 call purchase for $0.10 and an Aug 25 put purchase for $0.10 may be in order to protect against "catastrophic loss." I do like the fact that HV90&#8482 is 32 with the straddle sale closer to 37 vol.

    Details, trades, prices, vols, skews, charts here: