Schaeffer's Trading Floor Blog

Options Check-Up: Advanced Micro Devices, Inc., Baidu Inc (ADR), and Himax Technologies, Inc. (ADR)

Analyzing recent option activity for AMD, BIDU, and HIMX

by 10/22/2014 8:10 AM
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Among the stocks attracting attention from options traders lately are chip maker Advanced Micro Devices, Inc. (NYSE:AMD), online search giant Baidu Inc (ADR) (NASDAQ:BIDU), and LCD expert Himax Technologies, Inc. (ADR) (NASDAQ:HIMX). Below, we'll break down how options buyers are positioning themselves, and how much speculators are willing to pay for their bets on AMD, BIDU, and HIMX.

  • AMD rallied 3.8% yesterday to close at $2.77, but remains 28.4% lower year-to-date. Not surprisingly, option traders have been upping the bearish ante on the stock. Advanced Micro Devices, Inc.'s 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 2.42 sits just 2 percentage points shy of an annual peak. Regardless, those looking to buy AMD options will pay a fairly typical price right now, as the equity's Schaeffer's Volatility Index (SVI) of 72% ranks in the middling 52nd percentile of its annual range.

  • BIDU ended Tuesday 2.7% higher at $222.35, bringing its year-to-date advance to 25%. In the options pits, however, short-term speculators haven't been as put-skewed as they are currently, looking back one year. Specifically, Baidu Inc's (ADR) Schaeffer's put/call open interest ratio (SOIR) -- which measures both buy- and sell-to-open activity -- of 1.02 outstrips all other readings from the past year. Now appears to be a good time to buy (rather than sell) premium on BIDU options expiring within three months, as the equity's SVI of 41% is lower than 62% of comparable measurements taken over the previous 12 months.

  • Finally, HIMX tumbled 7.9% yesterday to end at $8.02, and on a year-to-date basis, the stock's deficit widened to 45.5%. Nevertheless, at the ISE, CBOE, and PHLX, traders have been buying to open calls over puts at a breakneck pace in recent months, per Himax Technologies, Inc.'s (ADR) 50-day call/put volume ratio of 15.69. From a pricing standpoint, the security's short-term options are quite expensive right now. HIMX's SVI of 103% rests just 2 percentage points from a 52-week high.

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Why Pre-Earnings Options Pricing is So Imprecise

Options pricing on post-earnings moves only gets it right about two-thirds of the time

by 10/22/2014 7:56 AM
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Our streak of days with high-profile earnings gaps ended at one yesterday, as Apple Inc. (NASDAQ:AAPL) had a relatively calm reaction to its usual stellar numbers. The options priced in about a $4 move, and the actual opening gap was about half that.

There was a long volatility "win," however, as The Coca-Cola Company (NYSE:KO) -- of all names -- was a serious disappointment. It wasn't the biggest score ever, though, for the options owners. The board priced in about a $1.20 move, and in actuality it gapped down about twice that.

All of which leads me to realize I better refresh what it is we're talking about here.

As we all know, most stocks tend to react to their earnings reports. Options anticipate those gaps via elevated implied volatility (IV). The trick is to estimate the degree of volatility "bid-up" and translate that to expectations about the earnings reaction. But, it's not so simple, as there are other drivers to options pricing. The entire world saw a big volatility bid-up recently, so how can you tell what was Ebola fear, for example, and what was anticipation of earnings?

The answer is that you can't do it with any certainty, but you can make educated guesses. The nearer the option to expiration, the more it's moving in relation to the expectation of a post-news reaction. Conversely, the further from expiration the option, the closer the IV is to the true mean volatility. So, to produce an estimate, you would have to translate the volatility curve into a percentage move in the stock.

Simple, right? Well, you don't really have to do the math yourself anymore, as most trading systems will calculate this number for you. With ThinkOrSwim, for example, you can find the number on the Trade Screen under "MMM."

Let's use AAPL for an example. The MMM was about 4, and the stock was in the 99s. That says that based on the IV curve, the options are pricing in a move of modestly greater than 4% the next day. That number is a standard deviation, so as such, it really says that there's a roughly two-thirds chance that AAPL moves within a 4% range, and a roughly one-third chance that it moves beyond the range.

Obviously, each stock has a sample size of one reaction, so it's best to view them all as one big package of numbers. And, if options are more or less pricing reactions correctly, about two-thirds of the names will settle within range of their expectations, and about one-third will move beyond those expectations and squeeze the options shorts.

Thus, when you see a Netflix, Inc. (NASDAQ:NFLX) and an International Business Machines Corp. (NYSE:IBM) and a KO move way beyond the numbers, it doesn't mean those quoted options numbers were wrong. Rather, it's expected that many numbers will miss -- a full one-third of them, in fact.

It's also unlikely that every given earnings season sees a perfect two-thirds and one-third split -- it's a dynamic process. If names keep missing, options prices will lift on the next batch of earners, and so on, until prices rise enough. And, of course, the same thing happens in reverse if everything is moving in line.

It's also improbable that these reaction estimates are exactly correct. An algorithm can guesstimate how a volatility curve will look after earnings, but it can't guarantee it. Perhaps longer-dated options carried more earnings premium than normal, or less premium, or whatever -- the point is, it's a guideline and not gospel.

Oh, and one final point. It's all a zero-sum game. Just because selling earnings volatility is likely to win two-thirds of the time, it doesn't mean it's going to work. The potential losses on those shorts are open-ended, whereas the wins are defined, as you can't earn more than the premium you take in. One NFLX can wipe out a lot of AAPL's.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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Analyst Update: American Eagle Outfitters, American Express Company, and Ford Motor Company

Analysts adjusted their ratings on AEO, AXP, and F

by 10/21/2014 1:27 PM
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Analysts are weighing in today on apparel retailer American Eagle Outfitters (NYSE:AEO), credit card giant American Express Company (NYSE:AXP), and Detroit darling Ford Motor Company (NYSE:F). Here's a quick look at today's brokerage notes on AEO, AXP, and F.

  • AEO is up 2% to trade at $13.82, following a "market outperform" initiation and new $17 price target -- territory not explored in more than a year -- at BlueFin Research. This positive brokerage attention is slightly surprising, given the shares' nearly 4% year-to-date deficit and recent struggles to surmount the $15 level. Taking a step back, American Eagle Outfitters has attracted significant interest from short sellers, as 15% of the stock's float is sold short. At AEO's average daily trading volume, it would take about a week to buy back all of these bearish bets.

  • AXP has tacked on 1.6% to hover near $85.35, despite seeing UBS cut its price target to $90 from $93.50, and reaffirm its "neutral" rating. Longer term, however, the shares are sitting on a nearly 6% loss in 2014, and got no help last week from another disappointing quarterly earnings report. What's more, even today's gains are being largely contained by resistance at the equity's 20-day moving average, located one penny above current trading levels. Elsewhere, during the previous 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), American Express Company has racked up a put/call volume ratio of 1.46. Not only does this mean puts have been bought to open over calls by about a 3-to-2 margin, but also, the ratio ranks in the 98th percentile of its annual range, hinting at a stronger-than-usual preference for bearish bets over bullish.

  • F is off slightly at $14.13, following a pair of skeptical brokerage notes, and ahead of Friday morning's earnings report. Specifically, J.P. Morgan Securities reduced its price target by $1 to $19 (but reiterated its "overweight" opinion), while Susquehanna initiated coverage on Ford Motor Company with a "neutral" rating. Today's losses, while slight, reflect the longer-term trend for the shares, which are 8.5% south of breakeven in 2014. Not surprisingly, options traders have been betting on additional downside in recent weeks. F's 10-day ISE/CBOE/PHLX put/call volume ratio of 0.41 sits just 7 percentage points from a 12-month high.

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Stocks On the Move: Harley-Davidson Inc, GoPro Inc, and ARM Holdings plc (ADR)

HOG, GPRO, and ARMH are moving sharply in Tuesday's trading

by 10/21/2014 11:57 AM
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U.S. stocks are higher in early action, as Wall Street cheers encouraging data out of China, an uptick in U.S. home sales, and a well-received batch of big-cap earnings reports. Among the names making significant moves are motorcycle maker Harley-Davidson Inc (NYSE:HOG), mobile camera concern GoPro Inc (NASDAQ:GPRO), and tech issue ARM Holdings plc (ADR) (NASDAQ:ARMH). Here's a quick look at how HOG, GPRO, and ARMH are faring on the charts today.

  • HOG is 7.3% higher at $62.62, thanks to a stronger-than-expected earnings report. After wallowing near annual lows yesterday, the stock is on pace to finish north of its 60-day moving average for the first time since late June. Today's earnings win was likely a disappointment to recent Harley-Davidson Inc option buyers, as the stock's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at 2.45 -- in the 82nd percentile of its annual range. In other words, in the two weeks leading up to HOG's report, speculators were buying to open puts over calls at a much faster-than-usual clip.

  • GPRO is 4.1% higher on no apparent news, though traders may be digesting leaked info regarding the company's newest camera. The stock has nearly tripled in value since going public in late June, and was last seen flirting with $79.04 and its formerly supportive 10-day moving average, which hasn't been conquered on a daily closing basis since Oct. 8, when GPRO was lingering near $90. Should the equity resume its uptrend, bearish analysts and short sellers could hit the bricks. Just two out of nine analysts offer up "strong buy" opinions, and short interest accounts for almost 41% of GoPro Inc's total available float.

  • ARMH is bucking the broad-market trend higher, down 5.5% at $39.26. In fact, the equity touched a new annual low of $37.75 earlier, as Wall Street pans the company's third-quarter earnings report. An analyst at Bernstein said it's "more and more likely" that last year was an exceptional one for ARM Holdings plc (ADR) and smartphone growth, and reiterated his "underweight" rating. Likewise, Canaccord Genuity, Benchmark, and S&P Capital IQ all downwardly revised their price targets, with the latter echoing a "sell" recommendation. There could be more negative notes on the horizon, too, as seven out of 11 analysts offer up "buy" or better endorsements, and the average 12-month price target of $52.31 represents expected upside of 33% to ARMH's current price.

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Analyst Downgrades: Chipotle Mexican Grill, Inc., Zynga Inc, and IBM Corp.

Analysts issued bearish notes on CMG, ZNGA, and IBM

by 10/21/2014 9:29 AM
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Analysts are downwardly revising their ratings today on burrito chain Chipotle Mexican Grill, Inc. (NYSE:CMG), social gaming specialist Zynga Inc (NASDAQ:ZNGA), and blue-chip tech giant International Business Machines Corp. (NYSE:IBM). Here's a quick look at today's bearish brokerage notes on CMG, ZNGA, and IBM.

  • CMG is poised to open 4.6% lower today, paring its 2014 gain of 22.6%, after the fast-casual restaurant operator predicted slowing sales trends for 2015. Analysts are weighing in on Chipotle Mexican Grill, Inc. this morning, with price-target cuts rolling in from four different firms -- including a decrease to $660 from $680 at Wunderlich. On the other hand, CMG has also racked up three price-target hikes, though Jefferies' upwardly revised target of $630 represents a considerable discount to the stock's Monday close at $653.03. Ahead of CMG's quarterly results, options traders were loading up on puts; the equity's Schaeffer's put/call open interest ratio (SOIR) stands at 1.31, with puts outnumbering calls among options set to expire within three months. This ratio arrives in the 62nd percentile of its annual range, indicating a stronger-than-usual skew toward near-term puts.

  • Benchmark cut its price target on ZNGA to $2.54 from $2.83, and backed a middling "hold" rating on the Tech 2.0 name. Zynga Inc is down nearly 40% year-to-date, and there's room for additional negative notes from analysts. Currently, the average 12-month price target for ZNGA stands at $3.54, representing a 54.6% premium to yesterday's close at $2.29. For the past couple of weeks, the stock has spent most of its time bouncing between $2.20 and $2.40, but ZNGA's upcoming earnings report on the evening of Thursday, Nov. 6, could provide a catalyst for its next big move.

  • On the heels of its major earnings disappointment, IBM was downgraded to "hold" from "buy" at Evercore, with the firm simultaneously dropping its price target to $180 from $210. Meanwhile, at least eight other brokers lowered their price targets for International Business Machines Corp., with a Credit Suisse cut to $125 representing the lowest forecast. IBM finished Monday's session down more than 7% at $169.10, bringing its year-to-date loss to 9.8%. The silver lining for Big Blue is that there's already a healthy amount of skepticism on display from analysts, which means a wave of additional downgrades is relatively unlikely. Already, only 25% of brokerage firms following IBM recommend buying it.

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