Wednesday, April 20, 2011

4/20 Earns

Update: BPOP has changed its earnings to April 25 before the open.

Tons of companies announcing earnings between today's close (April 20) and tomorrow's open (April 21).

The ones I've noted, taken from stocks having penny increment options, are AAPL, AMGN, AXP, BSX, QCOM, WDC, YUM, AMR, BAX, BBT, BPOP, F, GE, HON, MCD, NOK, NUE, SLB, UNH, VZ, WFT and XRX.

In selecting those I'm really interested in, I look at two things: Volatility and surprisiness.

I measure volatility by the 14-day average true range as a percentage of a recent price. I'm looking, generally, for 2% or more, the higher the better.

I measure surprisiness -- the tendency toward earnings surprises -- by the number of high-percentage surprises in the last five quarters. I count surprises of 50% and over, and of 20% and over. The more 50-percenters the better, but a good run of 20s can also be interesting.

So, out of the lot, I'm interested in BPOP, BSX, F, WDC, WFT and XRX.

BPOP, however, has a problem. It is priced at only $3 plus change, its option strikes are 50¢ apart, which is huge for such a low-priced stock, and the options don't have much open interest, meaning they have low liquidity.

I do note that there is a huge open interest on the May $3.50 calls -- more than 30,000 contracts -- and it is not offset by a similar bulge on the put side. So from that I assume there's an expectation for a positive earnings surprise.

Only one BPOP surprise has been positive the last five months. The rest have been negative. And nearly all have been huge: -384%, -953%, +2,521%!

So, if I were to play it, it would be as a call rather than a straddle.

The rest of my likes have very liquid options markets and I would play them as straddles.

(What I actually do is something I'll decide the last half hour of the trading day.)

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