Volatility Trading Digest - Quarterly Earnings, Rich Volatility Creates Selling Opportunity & a Biotech Idea
Volatility Trading Digest - Quarterly Earnings, Rich Volatility Creates Selling Opportunity & a Biotech Idea
Quarterly Earnings
McDermott International Inc. (MDR)
MDR is an engineering, procurement and construction company focused on offshore oil and gas projects.
We suggested a long call short put combination in early October. The October put expired for a .15 credit based upon our next Monday close record date, so presently the record is a net .60 debit for the still long November 15/18 call spread.
On October 26 the company reduced guidance for the third quarter ending September to .03 -.05 per share and the stock immediately closed off 3.66. They are scheduled to report third quarter on Tuesday after the close.
There is a good chance all of the bad news is now in the stock so we are going to suggest using another put sale as a recovery trade.
The current Historical Volatility is 114.187 and 78.63 using the range method. The Implied Volatility Index Mean is 71.68, down from 76.55 last week, for an IV/HV ratio of .63 and .91 using the range method. The put-call ratio is just bearish at .80. On Friday the options volume was 9,162 contracts compared to the 5-day average of 6,180 contracts. Consider this recovery idea.
In the event it closes below 12 at the November expiration be prepared to take the stock by assignment and then sell calls against the long stock.
Green Mountain Coffee Roasters Inc. (GMCR)
This company in the specialty coffee and coffee maker business is scheduled to report fourth quarter earnings on Wednesday after the close. The consensus estimate is .48 per share.
We suggested a bearish December put spread in two weeks ago, long the December 60 put and short the December 50 put. We booked the suggestion, which is still open for a debit of 2.02. The stock bounced off 60 and gained 9 points in the last two trading days. We presume on earnings expectations.
While we suggest keeping the put spread in place we also suggest lowering the SU (stop/unwind) to a post earnings report close above the downward sloping trendline at 78.
NVIDIA Corporation (NVDA)
NVDA provides high performance computing, and mobile computing solutions for interactive graphics on various devices ranging from tablets and smart phones to notebooks and workstations.
The put sale suggestion we made in Digest Issue 30, either resulted in a long stock position or was bought back at a loss on August 4 as it closed below 13.62.
They are scheduled to report third quarter earnings on Thursday after the close with a consensus estimate of .26 per share and a whisper number of .28 per share.
The current Historical Volatility is 62.27 and 51.49 using the range method, with an Implied Volatility Index Mean of 61.71, up from 55.78 last week. The IV/HV ratio is .99 and 1.20 using the range HV and the put-call ratio is almost bearish at .60. The option volume on Friday was 22,288 contracts compared to the 5-day average of 24,990 contracts.
Since the seasonal tendency is now more favorable for the tech sector here is another put sale idea.
Use a close below the last pivot at 13.53 as the SU (stop/unwind) or take the stock by assignment if it closes below the 14 strike price at the November expiration and then sell calls against the long stock position.
Molycorp, Inc. (MCP)
MCP focuses on the development, production and sale of rare earth oxides from stockpiled raw material. In addition, they have been acquiring companies related to rare earth materials.
MCP is scheduled to report third quarter earnings on Thursday after the close with a consensus estimate of .69 per share. In August, they reported .52 per share.
The current Historical Volatility is 78.84 and 77.60 using the range method, with an Implied Volatility Index Mean of 79.29, up from 74.88 last week. The IV/HV ratio is.99 and 1.02 with the range HV, the put-call ratio at .50 is almost bullish. Since the stock is in the middle of the 30-50 range, consider this strangle idea for the earnings report.
In the event it closes below 30 at the November 30 expiration be prepared to take the stock by assignment and then sell calls. In the event the stock increases and closes above 50, stock should be brought in to deliver against the short position when the stock is called away.
Rich Volatility Creates Selling Opportunity
General Motors (GM)
General Motors is scheduled to report earnings Wednesday November 9, 2011 before the opening with a consensus estimate of .99 per share. Since option volatility is high, it creates an opportunity to sell options.
For GM, the past quarter EPS was up 81%, and the company has a PE ratio of 6. Sales are up 19% quarter over quarter and the stock is in a 52-week range between 19.73 and 38.98.
Technically, GM has held support near the 50-day moving average at 22.75, and negative sentiment has been built into the stock, after GM announced disappointing car sales for October. The upside is capped by the 100-day moving average near 25.50.
The average at-the-money implied volatility at 50.26 is near the 52 week high while the HV is 56.90 and 44.71 using the range method, for an IV/HV ratio of .87 and 1.10 using the range method. Since the normal IV is in the mid 35 range it makes selling volatility attractive.
A strangle incorporating the technical support and resistance levels is an attractive strategy given the current high volatility level.
With a good bit of volatility edge, set the stop loss on a close above $27 or a close below $20. Take profit at expiration.
Biotech Idea
Celgene (CELG)
Below is one of the best trading setups featured over the past week in our newsletter. Celgene recently reported a solid quarter where they beat by 7 cents per share on the bottom-line. Consensus estimates for next year have gone up over 5% over the past 7 days. Sales growth has averaged 30% per year over the past 3 years and earnings growth has averaged over 41% over the past five years. The PEG ratio is a very reasonable .68. Stocks with this kind of consistent growth and rising estimates (combined with other key metrics) have historically beat the market by a wide margin.
The price of Celgene is pulling back to an unconfirmed uptrend support, which is typical after an earnings release like this. However, once the price breaks the short-term downtrend resistance shown in the chart below, many of our subscribers will jump in and buy call options with a good chance of success. Another good entry point is once the overbought/oversold oscillators start moving out of oversold levels. It may take a few weeks so the December calls would be a good place to look, as we get closer to expiration this month. The chart with the downtrend resistance drawn is displayed below.
All of the suggestions above are based upon last Friday's closing prices using the mid price between the bid and ask. On Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.
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