Volatility Explodes
Maybe they
needed to change more than the name of Nortel
(
NT |
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PowerRating) (formerly Northern Telecom).
Although the telecommunications giant reported $7.31 billion in revenue for the
quarter, that was on the low end of analyst’s projections ($7.3 billion – $7.8
billion). We talked about the relatively cheap options available ahead of those
earnings yesterday and those traders that jumped on NT options yesterday are
certainly ringing the bell today.
Here are
some of the other fiber-optic and other related sector plays we’re looking at:
Applied Micro
Circuits
(
AMCC |
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PowerRating), CIENA
(
CIEN |
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PowerRating), Cisco
(
CSCO |
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PowerRating), Corning
(
GLW |
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PowerRating),
JDS Uniphase
(
JDSU |
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PowerRating), Juniper
(
JNPR |
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PowerRating) and SDL
(
SDLI |
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Chart |
News |
PowerRating)
Of all the
stocks we’re tracking, only one has yet to report earnings and that is JDSU.
JDSU’s earnings due tomorrow, and the Street is looking for $.16, but we
expect them to do better by 2 cents (+$.18).
Normal (if
you can ever say JDS Uniphase is ever normal!) volatility for the fiber-optic
behemoth is 65%. The at-the-money (JDSU trading down 15 at 80) 80 November calls
and puts are trading 104%. That puts that November 80 straddle at $17, when the
“normal” volatility would price that straddle at 10 3/4. Thus, because of the
bad news from NT, JDSU and others in the sector are seeing volatility explode as
the Street wonders who will be next. This rapid expansion of volatility in JDSU options is the means we are looking at the exact opposite situation of what
existed yesterday in NT. Options in JDSU are expensive. They’re 160% of
normal, so astute traders will not be buying them–whether through either straddle purchases or other premium
buying strategies.
In contrast, the December 85 — 100 bull call spread for
$5 looks interesting. We
like the risk/reward as we’re only putting down 5 for the 15-point call spread
and we have nearly two expiration cycles for the stock to recover. The fact that
you can sell one option against each that you’re buying means you’re
negating much of the negative volatility and time-decay components associated
with option buying.