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Broadcom (BRCM) - Earnings Preview; Volatility Pattern and Straddle Sale

Broadcom (BRCM) - Earnings Preview; Volatility Pattern and Straddle Sale

At the time of this post BRCM was trading $37.91 with IV30 up 4.5% and earnings AMC yesterday. A market snapshot is below.



The Options Tab snap demonstrates a couple of things:



1) The front month ATM straddle is worth ~$3.31.
2) The front month vol (43.16) is 5 points above the second month (38.23) because of earnings vol.

The HV90 (longish term historical movement of the stock) is ~36, so the 43 vol in the front month is elevated.

BRCM has followed a consistent pattern for seven out of the last eight earnings starting with the 10-21-2008 cycle and ending with the last earnings cycle on 4-27-2010. Specifically, a straddle sale at the close on the day of earnings and a purchase back the day after was a winner seven times. The Earnings & Dividends Tab for those cycles is included with the relevant values highlighted.





What we're looking at:

(1) The top ROW is BRCM stock price 5 trading days before earnings through 5 trading days after.
(2) The second ROW are the front 2 month ATM straddles for the same period - focus on purple - the front month.
(3) The third ROW is the implied vol for those straddles - focus on the red - the front month. NOTE: The red line always collapses after earnings - this is called the vol crush after earnings.

The trade statistics for the straddle sale and purchase a day later are below.




We can see that the one loser was very small ($0.02). On average it's a 21% one day win.

Finally, the Skew Tab snap illustrates high elevated the front month vol and skew are relative to the other months.



This is trade analysis, not a recommendation.