Looking at Potential Earnings Moves

Cusick’s Corner 08-07-2012 4:16 PM

The market continued to chop around — wow, no insights there but the offensive sectors, XLE, XLY, XLI and XHB, were all up 2X the S&Ps which is supportive of the bullishness of the market. The Small Caps, IWM and RUT, were both breaking resistance, $80, which again is positive. Lastly, bond yields are moving up and prices down, the continuation of a trade out of bonds into… potentially equities. I am tempering my enthusiasm a little because the Financials, XLF, lagged the market move. Taking a look at after hours earnings names like PCLN — right now there is a potential move of ~$42 inferred through current option prices (with a 50% probability up or down). Let’s see what happens.

Stock market averages traded higher through midday and most of the gains held into the close on a slow news day. Another round of gains across the Eurozone helped set the table for morning strength on Wall Street. Italy’s MIB Index paced the advance across Europe’s equity markets with a 2.1 percent gain. The euro was steady against the dollar and crude oil prices added $1.23 to $93.43. Flight-from-safety led to modest weakness in gold, which lost about $2 to $1614 an ounce, and bonds. The benchmark ten-year Treasury lost 17/32nd and now yields 1.63 percent. The domestic economic calendar had no data and the corporate news was light as well. MGM, Emerson (EMR), and Chesapeake (CHK) were among the names reacting positively to profit reports. Nuance (NUAN), WMS, and Expeditors International (EXPD) saw post-earnings weakness. The Dow Jones Industrial Average was up 80 points midday and finished with a 51-point gain. The NASDAQ added 26.


Kraft Foods (KFT) added 27 cents to $40.87 and was one of twenty-one Dow stocks to finish with gains Tuesday. An interesting trade surfaced in the food company this morning when an investor sold 30,000 December 37 puts on KFT at 54 cents per contract and bought 30,000 December 42 calls for 84 cents. This Dec 37 – 42 bullish "risk-reversal", for a 30-cent debit, is a new position and will create the two largest blocks of open interest in the stock. Shares have performed well lately, up about 5 percent since earnings were reported last Thursday. The massive bullish combo in the December term seems to reflect expectations for further gains in the months ahead.

Bullish trading was also seen in Best Buy (BBY), MetLife (MET), and Barnes & Noble (BKS).


Pfizer (PFE) shares were down 52 cents to $23.74 and among nine losers in the Dow Jones Industrial Average today after the pharmaceutical giant announced the discontinuation of Phase 3 development of bapineuzumab intravenous for Alzheimer patients. Shares slipped on the news and call sellers were active in the name. The top trade was a 59,000-contract block of September 25 calls at 9 cents per contract. At the end of the day, 74,889 contracts traded against 87,484 in open interest. Some investors possibly opened positions in the contract in anticipation of good news, but then liquidated those positions on today’s seemingly disappointing announcement from Pfizer.

Bearish trading seen in American Capital Agency (AGNC), Sysco (SYY), and Red Hat (RHT).

Index Trading

CBOE Volatility Index (.VIX) fell to 15.48 this morning to test its July intraday low of 15.45, but finished up .04 to 15.99. Still, VIX, which tracks the expected volatility priced into S&P 500 Index (SPX) options, remains at the lower end of its recent range. The S&P has been grinding higher in relatively quiet fashion and today recaptured the 1,400 level for the first time since early-May. SPX added 7.12 points to 1401.35 and the 30-day historical volatility (based off closing prices) of the index is now 15.3. Therefore, since VIX is just shy of 16, it is not far S&Ps actual volatility. It has been somewhat rare so far in 2012 for VIX to actually fall below the S&Ps actualized volatility. That fact is perhaps one reason the volatility index bounced off the lows of the day and headed higher Tuesday, despite a 7.12-point gain for the S&P 500. That is, relative to actual volatility of 15.3, VIX is already at seemingly low levels.

ETF Action

An interesting spread traded in the SPDR Technology Fund (XLK) Tuesday. Shares edged up 20 cents to $29.95 and one investor sold 35,000 September 30 calls on the ETF at 57 cents and bought 35,000 September 31 calls at 22 cents. That is, they sold the Sep 30 – 31 call spread at 35 cents, 35000X. Recall that last week, September 30 calls on XLK saw a flurry of activity Wednesday through Friday. Shares are up 1.4 percent so far this week and the Sep 30s are now at-the-money. It’s possible that the investor is now liquidating a massive position in the contract, and now taking a new one in the Sep 31 calls. If so, the rolling activity in XLK options seems to express confidence that the move higher in the technology sector might continue in the weeks ahead. The ETF is one of nine sector funds that collectively hold the entire S&P 500. XLK holds all of the tech-related names.

Joe Cusick
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