Pfizer (PFE) is the 800-pound gorilla of the day. It announces tomorrow morning, before the open.
When I score these stocks, I'm looking to find which meet these criteria:
- The 14-day average true range (ATR) is 2.5% of the price or higher.
- Of the last five quarters, earnings have shown a 50% surprise, in either direction, at least three times, and additionally, a 20% surprise at least two times.
- I also look at the implied volatility (IV) of the options vs. the statistical volatility (SV) -- what the price of the stock has done in the recent past. Statistical volatility is sometimes called "historical volatility".
PFE falls below the high ATR cut-off but is surprise-prone, with three quarters with 50%+ surprises and two more with 20%+ surprises in the last five quarters.
Two companies announce after the close today: CHK and NLY. Five additional stocks announce tomorrow before the open: ADM, MRO, MYL, SU and TEVA.
Of those, NLY and MYL meet my criteria for surprisiness, and NLY also has an ATR above 2.5%.
Additionally, SU and TEVA have high ATRs but fall short when it comes to surprises.
The problem with all of these stocks as straddle plays is that their implied volatility is relatively expensive. Straddles are long option plays -- I buy them rather than selling them -- and that means that I want to buy low (cheap volatility) and sell high (expensive volatility).
So what's cheap and what's dear? It's all relative, of course. In my trading, I consider implied volatility to be expensive if it is higher than statistical volatility, and that is the case with all of these potential plays.
Bottom line for my account: I'm not interested in any of these guys.
Truth is, in the present market, it is hard to find cheap volatility, where implied volatility is lower than its statical cousin. It's the nature of our present position in the history of the markets, and suggests that straddles are not, for the moment at least, a very wise play.
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