MDRX - Professional Earnings Trading; Follow Up

Discussion in 'Options' started by livevol_ophir, Apr 8, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    Back by popular demand - the second case study on professional earnings vol trading.

    MDRX is trading 20.46 with IV30&#8482 down 14.2% (6 points).

    <img src="">

    This is the continuation of the first blog: <a href=""><b>How Pros Trade Earnings</b>(click to read)</a>. We looked at FDO before the fact, and now we'll look at MDRX after.

    MDRX reported earnings yesterday after the close. The Options Tab (click to enlarge) shows us the ATM (20) straddle fair values as of writing for the front two months are: $0.90 (April) and $1.85 (May).

    <img src="">

    The Earnings& Dividend Tab for the last 4 earnings cycles is presented (in the article). In the first blog I noted that some traders here on the floor are earnings players. They look for stocks with pre-dispositions to either trade through or below earnings vol (i.e. 9/10 or 10/10 times where vol was a purchase or a sale the one day before earnings relative to the one day after). These can be very large one day swings (as we saw in the first blog).

    <b>What's the pic showing?:</b>
    For the three prior earnings cycles, 7-20-09, 9-29-09 and 1-11-10 we see that MDRX was a vol sale. Specifically, looking at fair values of front month ATM straddles from the day before to the day after (one day swings). I have highlighted them with circles.

    7-20-09: $2.25 --> $1.90 or 16% one day change
    9-29-09: $2.53 --> $1.65 or 35% one day change
    1-11-10: $1.05 --> $0.65 or 38% one day change

    The Earnings & Dividends Tab for the four cycles before that are incuded as well (in the article).

    The same analysis for those earnings cycles is:

    8-05-08: $1.92 --> $1.70 or 11% one day change
    10-23-08: $1.85 --> $1.25 or 32% one day change
    1-08-09: $1.75 --> $1.07 or 39% one day change
    4-02-09: $1.72 --> $1.20 or 30% one day change

    Excluding this earnings cycle, we saw 7 consecutive times were a one day straddle sale was a winner. Assuming some slippage and commissions, perhaps the 8-05-08 cycle was a push - so we can say 6 winners, 1 push out of 7... Now this earnings...

    Front Month: $1.32 --> $0.90 or 32% one day change.

    That makes eight in a row (or 7 winners, 1 push out of 8). That's what they look for - they do this hundreds of times to wash away noise and try to accumulate wealth through "edge" bets... i.e. bets were they perceive the market gives a higher probability of a winner than a loser.

    Two major points here:
    (1) The past is not a guarantee of the future... It's not just a mantra...
    (2) Making $0.40 to vol wins several times in a row gets erased pretty fast if you lose $4.00 on one...

    This is trade analysis, not a recommendation.

    Details, straddles, prices, charts here: