BRCM - Earnings Preview; Vol Pattern and Straddle Sale

Discussion in 'Options' started by livevol_ophir, Jul 27, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    BRCM is trading $37.91 with IV30&#8482 up 4.5% and earnings AMC today.

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/TE7o8sAsaWI/AAAAAAAADwI/m76d1Ppwmc4/s1600/brcm_summary.gif">

    The Options Tab snap (<a href="http://livevol.blogspot.com/2010/07/brcm.html">in the article</a>) demonstrates a couple of things:

    1) The front month ATM straddle is worth ~$3.31.
    2) The front month vol (43.16) is 5 points above the second month (38.23) because of earnings vol.

    The HV90&#8482 (longish term historical movement of the stock) is ~36, so the 43 vol in the front month is elevated.

    BRCM has followed a consistent pattern for seven out of the last eight earnings starting with the 10-21-2008 cycle and ending with the last earnings cycle on 4-27-2010. Specifically, a straddle sale at the close on the day of earnings and a purchase back the day after was a winner seven times. The Earnings & Dividends Tab for those cycles is included with the relevant values highlighted (<a href="http://livevol.blogspot.com/2010/07/brcm.html">in the article</a>).

    <b>What we're lookin' at:</b>
    (1) The top ROW is BRCM 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/brcm.html">in the article</a>).

    We can see that the one loser was very small ($0.02). On average it's a 21% one day win.

    Finally, the Skew Tab snap (<a href="http://livevol.blogspot.com/2010/07/brcm.html">in the article</a>) illustrates high elevated the front month vol and skew are relative to the other months.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:
    http://livevol.blogspot.com/2010/07/brcm.html
     
  2. The P & L is more consistent with no outliers.....yet. :)