WDC Analysis

The data storage equipment maker Western Digital Corp. (WDC), headquartered in Irvine, California, publishes earnings on Wednesday after the closing bell.

[WDC in Wikipedia]

WDC

I shall use the DEC series of options, which trades for the last time 51 days hence, on Dec. 18.

Ranges

Implied volatility stands at 45%, which is triple the VIX, a measure of volatility of the S&P 500 index. WDC’s volatility stands in the 82nd percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	79.44	90.88	75.69
Lower	56.56	45.12	60.31
Gain/loss	16.80%	33.6%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

Analysts on balance expect a positive earnings surprise form WDC and I shall structure the position as a bull play.

Bull put spread, short the $65 puts and long the $60 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
	65	57.7%

The premium is $1.39, which is 28% of the width of the position’s wing. The stock at the time of analysis was priced at $67.92.

The risk/reward ratio is 2.6:1.

The strike is $2.92 below the market price. The biggest immediate move after each of the past four earnings announcements was $7.69, and the average was $3.49.

Open interest on the options grid is extremely concentrated, with the $65 put have five-figure open interest and the rest being in the double digits.

Decision for My Account

The low open interest on strike prices I need to construct my position is a deal killer and I'm passing on the trade. I won't be opening a position on WDC in connection with this earnings announcement.

-- Tim Bovee, Portland, Oregon, Oct. 28, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.