Wednesday, February 3, 2010

Earnings play in STLD

STLD reports today after the bell and I want to take a position to capture some possible upside. Looking at the front month straddle the options market is pricing in about a 10% move on earnings. So here is what I am going to do. I want to buy the Mar '10 $16 calls and sell the March '10 15 puts to enter into a "risk/reversal" or "synthetic" (skipping one strike down). I chose $15 to sell as this seems to be a level that the stock may have bottomed out.

In recent weeks STLD made a run to a new 52 week high of over $20 per share. Since then it has had a 25% pull back. Analyst are forecasting $1.37 per share for earnings next year giving this one an attractive p/e of about 11.67. Now keep in mind that these estimates bet on the continuation of the recovery. I point this out as I am willing to take delivery of these shares at the $15 level.

Here is the daily chart:

Notice that I have also plotted the HV and IV on the lower studies of the chart. There is only a 3.8% difference betweeen HV and IV. Which to me kind of seems cheap considering the options market is pricing in a 10% move based on the front month ATM straddle which is trading for about $1.5. So I don't think I will have to worry about much of a volatility crush after the release of earnings.

Next we have the risk profile fof the trade: I bougth 5 Mar '10 16/15 synthetic's long (Buying the $16 calls and selling the 15 puts) for a net debit of $0.40 per synthetic.

Above I provided a bunch of price slices as to what this thing might do. Since I am not too concered with a volatility crush because one there is not that big of a difference.

Next I took the distribution of Open Interest for Feburary. Since about 1/19 Open interest has been increasing on both call side and puts side. But the ratio of calls to puts is 1.54:1. So options players are indicating a bullish bias into earnings. $17 looks to be the home of the highest open interest and my act as a gravitational pull if earnings are good.

Currently the stock is trading at $15.89 going into the close. The estimate that the street is looking for on EPS $0.17 on Rev's of $1.08 Billion.


  1. I am also long CSCO into earnings via the Short Jul '10 $23 puts. I also have a the Feb '10 $20 puts for an extreme move to the downside. Spent like $50 bucks.

  2. is that distribution of OI chart and table part of thinkorswim?

  3. STLD reported yesterday after the bell. They missed the EPS estimate by $0.05 but beat the Rev number by almost $2 billion. The stock did have less than the 10% move that the market was pricing in. It is currently trading down about 4.7%. It is holding up well, I think on the back of the Rev beat. I have noticed that a lot of times a top line beat is more important to a bottom line beat.

    I am planning to hold the short puts to expiration. The calls on the other hand, I am holding for now but am devising an exit strategy. I have about 45 days until expiration of both.

  4. I really started to think about my rational for holding this thing. Especially after I saw it break $15. To be honest I really think that the only reason I was willing to take delivery of this stock is because that was a way around from being wrong at least for a while. It broke $15 and I don't want to let this thing turn too toxic.

    So I am using my prerogative as a trader to exit the trade and change my mind. Not every trade is going to be a winner and it is a part of the game to admit defeat.

    I was wrong and am ready to move on.

    CSCO had good earnings but in a weak market it is being overlooked. The earnings was enough to get out of my long for a small profit. So I exited but left my long puts that I had as a hedge on.

  5. I still have a few longer term holds with expirations in 2012 which I am not worried about. And a few positions coming up for front month expiry.