DUK - Earnings Trades and Cheap Vol Play

Discussion in 'Trading' started by livevol_ophir, Apr 28, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    DUK is trading 16.67 up 4.1% today with vol up 20%. The company has earnings next week.

    <img src="http://2.bp.blogspot.com/_hMry1m7UF10/S9hcuBuPa1I/AAAAAAAACFQ/WUMLUX18Ni8/s1600/duk_summary.gif">

    The company has traded over 20,000 options in the first two and a half hours on total daily average option volume of just 1,760. Calls are trading on a 5:1 ratio to puts. The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/04/duk.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/04/duk.html">in the article</a>) illustrates that the action is:
    May 17 calls (purchases), Jul 17 calls (purchases), May 16 puts (purchases), Jun 17 calls (purchases) respectively. In other words, people are swooping up the vol pre-earnings. Based on volume relative to OI (open interest) - the May 17 calls are opening as are the Jun 17 calls. From what I could tell witha bit of research - the May 16 puts are long open interest (these are double downs). I found the same for the Jul 17 calls.

    DUK has moved nicely today as vol has moved up into earnings next week. The May 16/17 strangle (buy May 16 puts, buy May 17 calls) for $0.30 looks like an interesting trade. Max loss is $0.30. The strangle goes up in value if:

    1) Vol continues to rise into (pre) earnings
    2) The stock moves above $17.30 or below $15.70 by expo.

    If (1) occurred - I'd probably sell it back out before the earnings vol crush...

    I'm not usually a big fan of buying strangles - especially into earnings, but this one is compelling given its cost. A quick (very quick) analysis of the Earnings & Dividends Tab for DUK illustrates that generally the stock doesn't do much - front spreading (selling) is more a winner than back spreading (buying). i.e. In general, selling the earnings vol (pre-earnings) and buying it back then next day (after earnings) is a winner.... How was that for contradictory?...

    I like the $0.30 purchase and the possibility of (1) above... But if it doesn't work, then I change my mind...

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols here:
    http://livevol.blogspot.com/2010/04/duk.html