INTC: Earnings Preview with Options & Skew

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

  1. livevol_ophir

    livevol_ophir ET Sponsor

    INTC is trading 22.54 - with earnings today AMC.

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    A simple trading strategy is examined, but first some summary stuff...

    The company has traded past its daily average in the first two hours (128,500 vs. 117,100). Calls have traded 2:1 to puts - but there hasn't been a strong directional bias from what I can see today. The Stats Tab and Day's biggest trades snapshots are included (in the article).

    The Options Tab (in the article) illustrates that the Apr ATM options are trading the heaviest (no surprise) with the Apr 23 calls trading nearly 30,000 on over 83,000 OI.

    The Skew Tab snaps can behelpful to look at for a visual illustration of the vol rise and crash. The Skew for today first (in the article):

    Note how much higher the red month (front) is than the rest. Next I have included (in the article) the Skew tab snaps from 1-13-2010 (one before last earnings) and 1-15-2010 (the day after earnings). You can clearly see where front month vol is "probably" heading tomorrow.

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    Now just becasue vol crushes after earnings - DOES NOT mean it's an automatic sale. Vol can go down and a stock can move huge. In fact, that's more the rule than the exception. Vol goes down b/c news is out - but stock moves size due to the news.

    I took a look at a simple strategy with INTC - sell the second month straddle the day of earnings and buy it back the next day no matter what. I used close to close values - i.e. sell the straddle at theoretical fair value (mid-market) right at the close then buy it back the next day right at the close. Since INTC has penny wide markets - the slippage is minimal i.e. fair value is sort of realistic. You can see what I found (in the article).

    In 7 out of the last 8 earnings cycles, that strategy was a winner. Max gain was 26% in one day, max loss was 37%. The gains other than the outlier were actually in a tight range: 13%-20%. The loss was the largest absolute move. In all, the move generated 10% average daily returns ex-commissions and slippage.

    Of course, if the strategy loses 37% again this cycle, then the strategy in total is barely a winner - and barely a winner for shorting earnings straddles doesn't like much fun to me in terms of risk:reward.

    Another BIG thing to keep in mind - checking out the Options Tab (above) you can see the May 23 starddle is priced at 27 vol. That's the lowest second month vol one day pre-earnings in the last 8 cycles (from what I see). So, basically... a vol sale looks less tastey...

    (1) I tried to be careful with my calculations but they aren't guaranteed! Use your Livevol Pro and verify, verify, verify...

    (2) This is trade analysis, not a recommendation!

    Details, charts, vols, skews, prices, trades here:
  2. spindr0


    IV for GOOG April options up about 25% over the past 3 weeks with May minimally up. Anything interesting going on there?
  3. livevol_ophir

    livevol_ophir ET Sponsor

    Yeah - I'll write about Goog on Thursday (during the trading day) right before earnings... You stole my thunder :(

    You can add yourself to the list if on the right hand side of the blog if you wanna just get auto updates...

    Or Twitter is even easier prob... @Livevol_Pro
  4. spindr0


    Nahhhh, just consider me your front man (this one time)

  5. livevol_ophir

    livevol_ophir ET Sponsor

  6. For goog, consider long ATM C and short second month OTM C at about a 2:1- 2.5:1 Ratio, for a credit or scratch. Emphasis on delta neutral.
  7. livevol_ophir

    livevol_ophir ET Sponsor

    I'm not a huge fan of being short wings in GOOG uncovered. Not worth losing the entire trading account on a single bet. I'll focus on butterflies...
  8. In general this would work very well. I would like to see how much this would've lost when Goog moved 100 points after earnings a year and a half ago, though. You know, worst case scenario type thing.

    I typically am defending positions around earnings rather than trying to put on positions to profit from them. My typical defense position is to basically get short a fly. I try to stay long the ATM for gamma, and stay short 5 to 10% OTM wing strikes so that I collect decay after the move. This can work wonders in Goog, as it pins 11 out of 12 expirations, including the earnings expirations. Likewise, Goog ALWAYS moves on the monday after expirations.
  9. Does your product have a way to do backtesting? I know we could license your tick database, and try to create a backtester that way. I am just curious if your main product will include a backtester app in the future.
  10. April 08. Long 10XATM Front month, Short 27X Back Month. - This raw position was down around -27.5K.

    I also had loaded on front month units around the same strike that I was short in the back month for the very reason you had mentioned. The net result was about +33k as the stock blew right through the front longs.

    I know this is not perfect because you can get pegged right at the 2nd month shorts and not get any additional moneyness out of the front month units. You could potentially put on another diagonal spread further out of the money, but you'll still be net naked shorts.

    Its a spec play for sure, but input appreciated.

    I just watched the LiveVol video the other day, looks pretty good, clean interface.
    #10     Apr 14, 2010