The Weekly Options Report: Living Life Above The RIMM
Last week in The Weekly Options Report we highlighted 2 strategies to consider heading into the coming week: 1) selling downside puts in Yahoo (YHOO) and 2) long weekly straddles in Cisco (CSCO) heading into earnings. While the YHOO trade was clearly a winner, the CSCO trade, for some, is still up in the air with one trading day remaining. Why do I say “for some”, because most perceptive traders would have exited the trade for a nice profit prior to the earnings announcement. Let me explain:
We initiated the CSCO weekly options straddle (18-strike) trade last Thursday before the close, paying $1.21. According to our analysis the CSCO 18 straddle looked cheap considering the large historical earnings related moves shares of CSCO have experienced in its recent past. A purchase of the at-the-money weekly straddle enabled us to capture daily stock movement and volatility changes (basically for free) heading into the earnings event. Now you may be asking yourself, what about the exponential time decay in weekly options? In the absence of any known catalyst, time decay would absolutely eat away at the value of a long weekly options straddle position. However theta concerns are significantly diminished when a known catalyst such as earnings is scheduled prior to expiration AND the implied volatility inherent in the options at the time of purchase appears to be cheap. Now clearly the latter part of the explanation is subjective, but if you have the tools and analysis to make a case for the relative richness or cheapness of implied volatility (see the Free TradeMonster Volatility Tools) you can find yourself placing long weekly options trades with limited downside. For a more detailed explanation of this highly profitable strategy I suggest picking up a copy of Trading Options At Expiration by Jeff Augen.
I mention this because just prior to Wednesday’s close, the 18-strike weekly options straddle in CSCO could be sold for $1.42, or an approximate 17% return without enduring an unknown earnings related move. I think most smart traders would prefer to lock in a 17% return vs. risking it all for no guarantee.
Weekly Options Catalyst Catcher:
Next week is lining up to be a big one for retail, with Wal-Mart (WMT), Target (TGT), Home Depot (HD) and Lowe’s (LOW) scheduled to report quarterly results. Having a bias for the tech sector though, the name I’ll be following most closely is DELL, which is set to report 3Q results on Wednesday. Shares of DELL have averaged a +/-6.4% move over its last 8 earnings announcements, with a high move of 13% occurring last quarter.
Using Thursday’s closing prices, the at-the-money weekly straddle in DELL could be purchased for $1.08, implying a 7% move over the coming week, which seems fair given the recent earnings related volatility we highlight in the chart below:
DELL Historical Earnings Volatility
Weekly Options Research Corner
A fairly risky trade I’m considering involves one of my favorite tech names to trade Research In Motion (RIMM). Through a series of failed product introductions, increasing competition, and general company mismanagement, shares of RIMM have lost over 70% thus far this year. Finishing Thursday at $17.58, RIMM is currently trading well under book value (~$19) for the first time in over 9 years. With an extensive library of patents some value in excess of $4 billion and a significant subscriber base (70 million), RIMM, in my opinion, is more likely to be acquired than to fall into oblivion in the near future. However all of my MarketClub Indicators suggest further weakness in the name in the near term. Volatility in RIMM remains elevated; 30-day implied volatility in RIMM is currently trading at 30 points over 30-day realized (see last chart), a pretty significant gap even with earnings scheduled for 12/15.
To take advantage of elevated volatility levels and a near-term short leaning bias I suggest purchasing the RIMM Dec 17.5-16 1×2 put spread. Using Thursday’s closing prices the1x2 put spread could be initiated for $0.46 credit, with a maximum profit of $1.96 occurring with shares of RIMM trading at 16 (or ~84% of book value) upon expiration. A graphical representation of the P/L of the 1×2 put spread is highlighted below:
Under this structure I profit as long as RIMM stays above the $14.04 level, a 21% decline from current levels and roughly 74% of book value). Disclaimer: You would have to be comfortable with the idea of becoming a long shareholder of RIMM in the event shares significantly fall upon entering into this trade.
Chart of the Week (courtesy of TradeMonster)
In this week’s chart we highlight options with 30-day implied volatility levels trading above 30-day historical realized volatility ranked from largest to smallest. We use this chart, and ones similar, to help assess the richness/cheapness of implied volatility. Do note we have not filtered the chart for names that have known catalysts occurring in the next 30 days.
Similar Posts:
- The Weekly Options Report: Markets Are Looking gRIMM?
- Watch For Volatility Around BBY Earnings
- Google 3Q Earnings Volatility Analysis & HPQ Weekly Options Activity
Mr. Saunders serves as Mesa’s Vice President of Marketing, bringing with him a wealth of experience in strategic marketing and operations. In this role, Mr. Saunders is responsible for overseeing all marketing activities, utilizing a blend of traditional and digital strategies to enhance brand presence and profitability, managing a multi-million dollar marketing budget across various media platforms, and leading the continued implementation of CRM systems to streamline customer engagement and drive business growth.