BBBY Earning Front Month Straddle

Discussion in 'Options' started by gulatin2, Apr 8, 2013.

  1. gulatin2


    BBBY has moved an average of 7.87% over the past 8 qtrs, and front month priced a move of 7.93% over the past 8 qtrs. All in all straddle has priced in expected moves closely for the last 8 qtrs. This time front month straddle is pricing in 6.57 % ( based on straddle pricing on close on 04/09)- which seems to be lower than what we have seen in the past 2 years. Current daily single std deviation move has been 0.75 which is close to historical moves. Straddle seems cheap as of today but conundrum is if market is pricing in straddle cheaply for a reason or are options just mis-priced

    Below are the returns on buying front month straddle a day before earnings and closing the position day after

    Median Return 14.57%
    Max Return 69.10%
    Min Return -29.15%

    ATM Calendars or ATM Fly seems like a good structure if you believe market is pricing it right - but once the vol comes out , your gamma explodes - which is a risk I am not able to determine should we be taking in this trade

    Any suggestion guys
  2. Long butterfly sounds better than a time spread due to vol crush
  3. BBBY:

    The simple route:

    Trade 1:

    Apr 70/72.5 bear call spread for $27
    Yield = 27/223 = 12.1% in 10 days
    Prob = 90.1%
    Expectation = .901(27) - .03(223) - .07(112) = 24.3 - 6.7 - 7.8 = 9.8

    Trade 2:

    Apr 60/57.5 bull put spread for a credit of $28
    Yield = 28/222 = 12.6% in 10 days
    Prob = 91.0%
    Expectation = .901(28) - .02(222) - .08(111) = 25.2 - 4.4 - 8.9 = 11.9

    Both together gives an Iron Condor.

    I happen to think the market is in more danger to the downside than the upside and thus would favor Trade 1.

  4. newwurldmn


    This looks cheap. What I would be careful for is the stock has rallied almost 20percent in the last one month. Has some information cleaned up the earnings move already: same store sales, etc.
  5. i don't know anything about options involving the statistics of it (i'm planning to learn more) but I bought the 62.5 calls at .55 in later part of feb and sold 2 weeks ago ~3.40.

    basically the company has always traded around 15 P/E and the guidance in the 8-K given should have priced the company at around $68, yet in late feb it was trading at $57, it made no sense to me. I think part of the scare is due to the threat of AMZN, yet BBBY keeps meeting guidance and growing sales.

    So looking at your possible trades, I think its being priced that it will hit ~$70 if earnings are good and $58 if miss or poor guidance.
  6. gulatin2


    Put on 3 May60/65/70 flys and added May 60/72.5 strangle as hedge for blow up - May IV to drop by at-least 11.56 points after earning

    Guys what do you think of this trade structure
  7. newwurldmn


    Changed your thesis from long gamma to short?
  8. gulatin2


    IV for BM will come in by atleast 11.56 points after release, FM straddle is priced in at cheapest levels in last 8 qtrs, and what's interesting to me is that option market has even discounted the risk of blow ups as we see in last few earning releases, so that is making me incline to short vega & short gamma.

    I mean if straddle is priced in that cheap, there's gotta be a reason for it.

    What are yours thoughts on it
  9. gulatin2


    That's the position I ended up putting eventually

    Apr 65/67.5/70 added extra 60/70 strangle to ride the strong move up or down if there is one

    Reason 1. ATM 65 were priced cheaper than 67.5 , 70's were quiet flat - Buy Low sell high - edge created by buying Low IV and selling High IV

    Reason 2. If 67.5's were catching a bid leading to rise in IV,meaning there a demand on expectation in market it can go upto 67.5

    Reason 3 : Not too bullish on gamma here, so this position gives me that

    Reason 4: Expecting a vol crush of atleast 30 points in front month, so if underlying moves up slightly , vol crush will help significantly

  10. There is no marketable skew in the 65/67 strikes. Maybe 1-2 cents. How do you know it's call interest and not the 67P? You bought the 65-70 fly? You're structured in something approaching a backspread, but I don't know the ratio on the outside strangle.
    #10     Apr 10, 2013