Russell’s Round Up – Weekend Review

The weather has turned consistently warm in Chicago.  Once it is summer in Chicago the time of year means just one thing to Chicagobased option traders. No, it is not that diehard Cub fans are finally using the phrase, “Wait until next year”. 

It’s time for second quarter earnings season to kick off.

Barron’s –

Steve Sosnick from Interactive Brokers took over the Striking Price column this week and does a good job of discussing volatility. He discusses the increase in implied volatility that has come about lately as the market place has witnessed an increase in demand for call options on the XLF. He then puts this in perspective as far as exactly what 20% implied volatility for XLF options means on a day to day basis.

Michael Santoli talks about the overall market as we enter the summer edition of earnings season this week. He notes the stock market did not react as negatively on Friday as one would have expected based on the numbers. Looking forward he (and many other market observers) think this is an indication of high expectations regarding the news that comes out of earnings releases over the next few weeks.

Option’s Action –

The discussion kicked off with a focus on how the market sort of shrugged off the employment report. The conventional wisdom is that the market is waiting for earnings.

Google (GOOG), which reports this Thursday, was discussed by Dan Nathan. As of Friday a 5.5% move out of GOOG was being priced in by the option contracts. Last week’s program noted that the earnings related price move for GOOG move has been 6.1% over the past eight earnings reports. The trade recommendation on GOOG is bearish based on the stock rallying lately and having a contrarian view relative to this price move. Also, the last earnings announcement for GOOG was pretty negative and there is the feeling these negative trends could continue. The specific trade is to buy a July 520 Put for 9.50 and sell a 490 Put for 2.10. The result is a trade that costs 7.40 and if the stock has a dramatic draw down on earnings could result in a profit of 22.60. GOOG closed just over 530 on Friday so the stock at 490 does represent a 7.5% move down which is a little more than the moves off recent reports. The breakeven point for the trade is at 512.40 which would represent a 3.5% move down, well within the historical range. I do plan to follow up with where bearish spreads on GOOG are priced later this week in front of earnings.

As a side note, it was mentioned that Wall Street analyst opinions are very bullish on GOOG – 33 Buy, 6 Hold, and 0 Sell ratings.

Michael Khouw discussed Citigroup (C) into their earnings report this week. He noted that shares of C have moved an average of 3% on their earnings releases in the last two years and that the options are discounting a move of 3.5% into the upcoming report. The recommendation on C is a bullish one in the form of a Call Fly. This spread involves buying a call, selling two calls at a higher strike price, and then buying one more call at an even higher strike price. The goal is to have the stock trade up to the short strike options and stall out. This spread is being created using the July 43, July 45, and July 47 Calls. The C Jul 43 Call is purchased for 0.45, two July 45 Calls are sold at 0.10 each and the July 47 Call is purchased at 0.05. The net result is a cost of 0.30. If the stock trades to 45.00 at expiration the result is a profit of 1.70 on a cost of 0.30. However, do keep in mind, this involves hitting a pretty specific price point at expiration, in this case that price point is 45. I’ll circle back on this one as well before Citigroup’s earnings release on Friday morning before the market opens.


The nice thing about earnings season is if your trade doesn’t work out you don’t have to wait until next year, you just have to wait three months and earnings season comes back around.