ISRG Earnings Trade Idea

(editors note: Dan sent this to us last night)

Background and Homework:

ISRG reports earnings after the close of trading tomorrow Thursday July 19. Average move on earnings last 4 quarters is about 6% . Last earnings April 17 ( after market close) , stock went up 7% from $545 to $584. January 19, 2012 earnings saw ISRG go down 6% from $474 to $445. Stock closed today at $549 range. Earnings come out after close tomorrow. 6-7% move on current stock price would give a range of roughly $510- $587. Market makers expectation of the move tomorrow is in the at-the-money straddle, currently priced at almost $33 (6% predicted move). Past earnings and straddle point to a 6-7% move. Can it be more or less? Of course!

Trade Idea:  

I would sell the ISRG strangle very, very, small if I thought we wouldn’t move over 7% on earnings. With current price at $549, I might sell 1 July 610 call $1.30 and 1 July 485 put for $1.50, for total credit of $2.80. Breakeven points of roughly $482 and $613 will cover a price move of about 12%! Can this trade lose? Yes, if we move more than 12%. Do I think it will happen? No .  Do I think this trade will make dollars? Yes.  

BUT,  because this is a short strangle with unlimited risk I will enter trade very, very small! I would wait till the afternoon tomorrow (editors note: that’s today) to place the trade if I was going to and I would look to sell my call about 60 points out-of-the money and the put about 65 points out-of-the money.

Thanks and have a great day! Dan Sheridan

No Comments
Dan Sheridan

Dan Sheridan is a 22-year CBOE veteran who worked with the highly successful specialist firm Mercury trading, which was headed up by Jon and Pete Najarian. While at Mercury Trading, Dan was responsible for training most of the traders including Pete Najarian, one of the current hosts of CNBC's Fast Money. Dan has been teaching…