Thursday, February 21, 2013

HPQ - Earnings Trade Gone Wild

Hewlett Packard  (HPQ) reports earnings after the bell today.  Option prices for the stock are incredibly high.  More like a start-up than a dow component.  It is understandable that there is more than average uncertainty in this earnings announcement but option implied volatility over 100.....that does not seem "rational".

CCI still holding a losing position.  Here are the "wild" trades placed against half my position today with HPQ trading around $16.80
  • Sold the March 16, $18 call for a $.33 credit after commissions
  • Sold the Feb. 22 $17.00 put and bought the Feb. 22 $16.50 put for a credit of $.22 credit after commissions. (As an aside, something to ponder: a weekly option, with 1 day until expiration, with $.50 width strikes, with volatility over 180.   That is not your father's stock
There are too many scenarios to document them all, but here are a few thoughts.
  • CCI collected $.55 in credits... mine to "keep".
  • Worse Case  - My thesis is that HPQ has missed and lower estimates so many times that management will not let that happen again....but I've been wrong about that before and could be again.  If earnings are disappointing the stock will very likely fall below the $16.50 strike.  In that case, CCI will make the $.55 form the option trade, and lose the $.50 width of the strike on the put spread.  That means pocketing a whole $.05/contract  and continuing to have the "opportunity" to hold this "blue chip" stock.
  • Best Case - Earnings are received positively and the stock goes up past $18 and stays there. In this case half our position will be called away at an effective price of $18.55 ($18 price plus $.55 option credit)
  • Middle Case - There are many scenarios in-between these extremes.  Scenarios where the stock manages to hover between $17 and $18 will allow the opportunity to take most of the option profits and live to fight another day.  Not a bad outcome.

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