(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!
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