Interesting TIVO earnings trade
From my earlier posts on trading earnings you can see that my preferred option strategy is to sell strangles. I normally open the trade before the earnings announcement and close the trade straight after. This type of earnings trade relies on a volatility crash.
However from my analysis of potential earning trades today I’ve noticed an interesting trading opportunity with TIVO.
TIVO didn’t fit my safety profile for my typical earnings option strategy since the volatility profile wasn’t consistent enough. I like to make sure I leave myself a very wide margin of safety.
In general I like trading earnings announcement closer to expiration because those trades are more effective. Since we are just after the August expiration it is harder to find opportunities at the moment.
However from the historical analysis I’ve identified another type of earnings trade for TIVO involving an intraday option strategy. Have a look at the price movement analysis for TIVO after the earnings announcement. The movement is in number of standard deviations.
TIVO shows very large intraday price movements after earnings announcements. That’s represented by the green open to close intraday movement. The average post-earnings intraday movement is about 2 standard deviations. That’s equal to $0.80 or 10% of the current price. Interestingly the size of standard deviation movement also is increasing. But that’s just anecdotal not statistical, so I wouldn’t form a trading plan around that.
Currently TIVO is trading at $8.02, with one standard deviation equal to $0.42. The volatility for the September options series is 96.5%. The implied volatility of an ATM (at the money) straddle is around 82%.
The table above also show some important data for TIVO on the day of the earnings release. The overall average intraday range is around 3 standard deviations. The exact open to close average price movement is around 1.8 standard deviations. This shows that TIVO stock tends to make a large intraday price movement followed by a retraction towards the end of day.
Proposed TIVO options trade: Intraday long straddle or strangle post earnings
The large intraday price movement makes an intraday long strangle on TIVO an interesting trade to put on after the earnings announcement.
The risk of this trade is related to a volatility decrease during the day. Since there are still 23 days left until the September series options expiration there will be minimal time decay. I expect a volatility crash of around 10%. Normally the volatility crash on stock options after earnings has stabilised after the half hour to hour after the start of trade.
In summary an interesting trade with minimal risk could be to open a long intraday strangle with TIVO options after the first hour of trade.
This trade should be closed at the end of day. Leaving the trade open overnight will simply expose the position to time decay and further volatility risk. You should take profits if the stock has made an intraday price movement of around 10%.
A word of caution. I normally don’t put on these types of trades. The intraday volatility pattern of TIVO options after earnings needs to be analysed as well as the timing of the price movement.