Saturday, January 17, 2009

Earnings Week of 1/19/09

Another Sunday, another look ahead into the earnings releases. Since I noticed an uptick in traffic to the blog this week, I’m going to take a bit of a detour here and explain for any new readers, the approach to the weekly earnings post. Previous readers can skip the next couple of paragraphs:

First, the earnings report has its origins in an attempt to more easily identify better candidates for using options to strangle/straddle the earnings event. For this reason, the workbook below is not an all-inclusive list of every company that will be releasing earnings in the coming week. Instead, the list is a result of screening for option availability/liquidity and share price. Typically, this has meant a total call/put volume of 2500 contracts in the prior month as reported by CBOE and a share price above $5. In terms of the remainder of the sheet’s contents, most of the data is assembled from Yahoo! based on Friday’s closing prices. The approximate IV is calculated within the sheet based on these same prices but from Sunday until expiration. One very, very important thing to remember is that this sheet will not dynamically update with new information throughout the week. So while it is pretty decent for Monday & Tuesday, average for Wednesday, by Thursday and definitely Friday the accuracy of the numbers deteriorates somewhat – particularly in a week of options expiration. (If anyone has an idea about how to address this, I’d like to hear about it. Or if they can explain why Google Docs won't show the color formats for the short interest and 52-week high/lows.)

As far as my comments go, I usually won’t discuss financial institutions because of what we observed this week with C and BAC. They are not to be trusted, have no transparency, and are prone to somewhat unforeseen and massive interventions from the Treasury. One could argue that this is exactly the conditions a strangle/straddle is intended to work under but why comment on something that is so rigged? When the sheer number of earnings releases are significant (as this week), I will omit comment on a fair number of them and try to focus on companies with certain flags that signal potential to move - high short interest, low float, historical movement, etc. The other group will be Dow components or companies that the entire market pays attention to.

So with the basic logistics out of the way here’s the table for the week:

Spreadsheet Link

Some intial comments: Thankfully, Monday is a day off this week as the heavy lifting of earnings work begins. Enjoy it. Possibly even reflect, if you're so inclined. The rest of the week kind of paralyzes me though. There are considerably more companies releasing earnings but generally, the options pricing anticipates price movements outside of historical norms across the board and makes me want to issue a blanket "stay away" statement unless legging into a position is a possibility. Keeping that in mind, I'll likely just highlight a few names below and leave it to the reader to use the data presented as they see fit. Perhaps I'll revisit these on Wednesday once the market has provided some new inputs to work off of.

Tuesday: Two Dow components (together about 13.74% of the index) in IBM & JNJ. Looking beyond these two, the options prices reflect significant expectations of volatility. The average downside expectation is -18.5% and upside average is 21.6%! While a few of these companies have moved that much in a single day in the past, that is no guarantee of this quarter's performance. Unless you are able to leg into a straddle, that strategy looks best avoided for almost every single one of the companies releasing on Tuesday. It is possible that this will change by the time the market opens on Tuesday and more attractive contract pricing will be available but be careful. CSX might be notable for indications of rail-freight traffic.

Wednesday: AAPL is probably the name that will garner the most attention. I've insisted for some time that AAPL is a maker of luxury goods in a recession. Throw in the weakness in the stock that reflects Jobs' health and who knows what could happen. It seems incredible that the contracts price in a potential move to 70 in the next month but a look at the chart does not show any real support once 80 is broken. This intrigues me, could this finally be a moment when the true believers throw in the towel or will AAPL again beat sandbagged estimates? AMR and UAUA release and should provide some indicators of business travel and how lower fuel costs have impacted their bottom lines considering they haven't rescinded any of those fees they've piled on during the last quarters. There will also be a 2nd rail indicator with BNI. Finally, DJI component UTX releases.

Thursday: Things get a little more interesting. Two more rail companies in CNI/UNP. A whole slew of financial names: BK, BBT, COF, FITB, MTB, PBCT, STI & SNV. And then some significant tech names: GOOG and MSFT. To top it all off, some volatile darlings like ISRG & POT. This week I really am going to revisit Thursday and Friday on Wednesday since a few of these could be worth commenting on there is a bit more clarity and the time is closer. Stay tuned for then. I will make one comment on SYNA - keep an eye on it since the short interest is monstrous. This could be one where a strangle position is established and both legs increase in value jsut because of IV inflation running into the event.

Friday: See above except to note that GE releases. SLB is perhaps also notable since it is the leader in oil services industry.

Sorry for the wishy-washy stuff this week (again) but the market behaviour in the last week seems to have bumped up the options pricing and confused traders again. Check back on either Tuesday night or Wednesday for some clarity on Thursday's releases.