HSP - Strangle Buyer into Earnings on Pattern

Discussion in 'Options' started by livevol_ophir, Jul 13, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    HSP is trading $59.02, up 1.4% with IV30&#8482 down 1.8%.

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/TDy4cqeepZI/AAAAAAAADfw/3PO8SDdqTdw/s1600/hsp_summary.gif">

    Hospira, Inc. is a specialty pharmaceutical and medication delivery company that develops, manufactures and markets products. Its portfolio includes generic acute-care and oncology injectables, as well as integrated infusion therapy and medication management systems.

    The company has traded over 3,500 options on total daily average option volume of just 215. The largest trade was an Aug 55/65 strangle bot 1,250 times (or 2,500 contracts). The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/07/hsp.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/07/hsp.html">in the article</a>) illustrates that both the calls and the puts are mostly opening (compare OI to trade size). You can also see that we project earnings in the August cycle (a vol event).

    <b>Trade Stats</b>
    Buy 1,250 Aug 65 calls for $0.30
    Buy 1,250 Aug 55 puts for $0.80
    Total debit = 1,250 * 100 * $1.10 = $137,500
    At expiration, for the strategy to be profitable: $53.90 > Stock > $66.10

    The Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/07/hsp.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    I've highlighted the last two earnings cycles on the top. We can see the stock can definitely move on earnings reports. It is, however, also interesting to note that the IV30&#8482 is well above the HV20&#8482 (red line is above the blue line in the bottom chart). While it's fair to expect vol will increase into earnings, this is not an obviously "cheap" vol purchase to me.

    Finally, the Skew Tab snap (<a href="http://livevol.blogspot.com/2010/07/hsp.html">in the article</a>) illustrates the vols by strike by month.

    The skew looks pretty normal. Nov and Aug ATM vol are essentially equal; there will probably be another earnings cycle in the Nov options, so that makes sense.

    This is trade analysis, not a recommendation.

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