Earnings Season Without The High Volatility Spells Opportunity
As we’re in the heart of the
earnings season, we thought it might make sense to take a look at two stocks
that are due to report and some strategies to take advantage of what the market
is giving us in those securities.
First, we looked at E*Trade
(
EGRP |
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PowerRating). Overall, EGRP’s move into
retail banking through its telebank arm seems to be paying dividends, their
online bank posted a $1 billion increase in deposits in the December quarter.
Next, the broker announced that it will abandon the Nasdaq for the NYSE. Clearly
a step up in prestige, but not really quantifiable or bankable. Lastly, the
Street is getting more comfortable that the worst may be over for the online
brokers.
Volumes are lackluster in EGRP options, but surprisingly, volatility is down
ahead of the earnings announcement. That creates a rare opportunity for someone
bullish (or bearish) on EGRP to position ahead of what is normally an event that
can propel the stock rather significantly without the overhanging risk of
premium contraction (**For new option traders, it is common to see a 40% – 60%
boost in volatilities ahead of an earnings report).
With EGRP trading 13 5/8, the 12 1/2 calls in February are trading for just 1
7/8. If the volatility had spiked to the 110% level it was at for the October
earnings report, those same 12 1/2 calls would be trading for 2 1/4. That $3/8
might not seem like much of a difference, but keep in mind this is a very
inexpensive stock and that this would represent a $3.75 difference for a $100
stock.
Another interesting stock we’re following is Qualcomm Inc.
(
QCOM |
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PowerRating),
which is due to announce earnings tomorrow.
QCOM volatility is down rather substantially. The volumes remain high, but given
the 4 1/4-point sell-off today (12:15 CST) along with the relatively cheap
volatility, make a limited-risk bull-call spread a prudent speculation. With
QCOM trading for 73 1/2, you can buy the FEB 75 — 85 bull-call spread for a
mere 3 1/2. That’s paying 5 5/8 for the FEB 75s and selling the FEB 85s for 2
1/8. Great risk vs. reward, plus
a bullish directional spread in one of the premier tech companies.
