PWRD - Earnings Play on Elevated Vol

Discussion in 'Options' started by livevol_ophir, Aug 16, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    PWRD is trading $24.80 with IV30&#8482 up 9.2% and earnings today after the bell.

    <img src=">

    The company has traded over 5,600 options on total daily average option volume of just 1,181. The Stats Tab and Day's biggest trades snapshots are included (<a href="">in the article</a>).

    The Options Tab ((<a href="">in the article</a>) illustrates the action and the current prices. Last earnings cycle PWRD gapped down hard, closing at $24.71 down from $32.94 the day before. The vol is elevating into the earnings release today.

    Looking at the front month ATM and the wings around it, an interesting trade to analyze arises.
    <b>Trade Stats</b>
    Sell 1 PWRD Aug 25 call @ $0.90
    Sell 1 PWRD Aug 25 put @ $1.10
    Buy 1 PWRD Aug 26 call for $0.50
    Buy 1 PWRD Aug 24 put for $0.65
    Total credit = $0.85. The max loss is $0.15. MaxGain/MaxLoss is 5.67:1. If the stock stays in the range ($24.15, $25.85) by expo, the trade is a winner ex-commissions. The ikplicatin is of course, the odds of the stock staying in that range are worse then ~ 1:5 (ok, so I'm being very rough).

    The Skew Tab snap (<a href="">in the article</a>) illustrates the vols by strike by month.

    Notice how high the front month is (red line) relative to the rest since it is essentially entirely earnings vol.

    Finally, the Charts Tab (6 months) is below (<a href="">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 where the stock gapped down last earnings. This thing can move on earnings; naked sales are probably not a good idea.

    DISCLOSURE: I hold this position at the time of writing.

    This is trade analysis, not a recommendation. I'm just looking at would could happen.

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