Yesterday we witnessed the stock (and option) price reaction to earnings from tech industry bell weathers Intel (INTC) and IBM (IBM). Both reported earnings that were not particularly well received by investors as INTC dropped from 22.35 to 21.79 for a loss of about 2.5% and IBM took it on the chin losing 10.37 and closing at 200.63 for a drop of almost 5%.
What I always like to take a look at is the at the money straddle just before earnings. For IBM this was the IBM Oct 210 Call + Put which expire this week. The implied volatility indicated by these options was around 33% on the close Tuesday and dropped to 16% after the big drop yesterday. Even with the drop a buyer of this straddle would have made out ok as the 210 Put was up nicely. Long straddles usually are a risky strategy going into an earnings report due to the inflated IV and the subsequent drop in IV. This is a case where the stock price move overcame the drop in IV, but this is more of an exception than a rule.
INTC was an interesting case. With the stock at 22.35 I focused on the INTC Oct 22 Straddle which had priced in IV of around 48% before earnings and 20% after a day of trading post earnings. Here’s the lesson in a volatility crush. Let’s say you felt INTC would trade down from 22.35 to 21.79 on the earnings report. There’s no way you could have known this, but if you had a perfect outlook for the stock you may have taken a look at buying the INTC Oct 22 Put just before earnings for 0.28 on Tuesday afternoon, again with INTC trading at 22.35. That same put option closed yesterday at 0.29 up 0.01 on the day. Right on direction but hit by the drop in IV would have resulted in basically a break even trade through buying the INTC Oct 22 Put in front of earnings.
Later today – I’ll take a look at Google (GOOG) option trading and then follow up Friday. This is one I always love to watch around earnings.