Following a recent debilitating correction in key green-shoots commodities like silver (SLV) and oil (USO) and an ailing financial sector chirping like a canary last Friday with its technical breakdown, the NASDAQ 100 saw some definitive tech-wreck behaviour in Monday’s session.
Led by Amazon’s (AMZN) powerful bout of profit-taking of nearly -5.0%, fellow heavyweight constituents Apple (AAPL), Microsoft (MSFT), Yahoo (YHOO), Google (GOOG), Baidu (BIDU), Priceline (PCLN) all saw fair stiff sized percentage and daily chart technical damage. Perhaps though, the most ominous action however came from computer hardware giant Dell (DELL)?
The erstwhile growth outfit reports Tuesday after the closing bell. Analysts expect the company to report a profit of $0.44 per share, which compared to the prior year’s figure of $0.30 and 2009’s $0.24; does seem to hold some of that old growth magic.
A look at Dell’s shares on a weekly or monthly basis and some of “old growth” is definitely apparent. Over the past two years DELL is up a rather meagre 40% compared to the Naz 100’s 65% gain. What’s more, while the Naz has just finished challenging ten year highs, DELL is still challenging its two year highs and remains nearly 75% below its all-time-highs set eleven years back.
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Figure 1: Dell Weekly Chart
Nonetheless, investors, including many longer-term types, didn’t appear to be taking any chances on shares Monday. Or were they? A contract surge to 288,000 and more than 1000% above normal saw three times as many puts change hands in frenetic and some decently bid trading relative to statistical and implied range values of the past few months.
For the closest pure play positioning available to option traders, the ATM May 16 straddle “implies” traders are theoretically pricing in a 1SD or 68% chance shares will move up or down no more than about 9% through expiration using an implied volatility calculation of 85% and 4 calendar days of life in the delta neutral strategy’s life remaining.
The 9% estimate compares to last quarter’s immediate bullish response of nearly 12%. However, that reaction in shares appears much more severe relative to its recent history. A quick and dirty eyeing of post earnings reactions shows a very loose range from about +/- 1% to about 10%.
Statistical volatility is running markedly higher right now. In front of the last earnings event, a range of about 15% for short-term readings to roughly 23% for longer-term levels existed. As of last night, that same eyeballed range was between 20% - 31%. Depending on how quickly fast money straddle operators act, there will be three full days to potentially make that straddle work for the trading account or not...if errors in hedging are evident at the end of the day, day two or day three and in hindsight of course.
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Figure 2: Dell (DELL) ATM Short May 16 Straddle Post Earnings
Short straddle players will, of course, want minimal movement to coincide with an expected volatility crush of at least 50% in order to better capture theta, which stands at 100% of the straddle market and an actual dollar price tag of $1.12 per spread.
Shown above in Figure 2, readers are looking at an illustrated -10 May 16 straddle position adjusted for a 50% drop in implieds with three days until expiration. Without too much thought involved, it stands to reason long straddle holders will hope for a bit more from shares than normal circumstances dictate and move beyond those same breakevens.
It is noteworthy that those traders interested in the immediate impact of earnings were in the minority Monday. The fore-mentioned straddle market only traded 3,200 to 3,500 contracts collectively and compared to open interest of 36,000 in the call and 12,000 in the put. That said and looking for where the described healthy put activity was most evident; the August and November 15 and 16 puts saw heavy volume throughout the session.
At the end of the day, that action resulted in fairly even activity of 26,000 to 30,000 in August on each of the two adjacent strikes and even more identical-looking action of 31,000 contracts in November. The activity was pretty much on par with existing open interest which as noted in yesterday’s Lunch Option column, was already seen as making any accurate read on opening or closing efforts, as well as the possibility for rolling up or out, both or just interest in outrights by traders; difficult to interpret.
Well bid premiums did seem to suggest net buying on the part of traders in the puts. However, with Tuesday’s early read showing markedly lower levels of continued interest in those same four strikes, I’m not so sure investors are still saying, “Dude, It’s a SELL” and it’s somebody else’s guess as to what did or didn’t go on.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate