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Is Medtronic, Inc. (MDT) Headed for an Earnings Surprise?

Call options in demand as MDT approaches its earnings report

by 2/15/2013 11:03 AM
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With earnings due next Tuesday morning, something interesting is going on in the Medtronic, Inc. (NYSE:MDT - 46.76) options pits. Call volume has surged dramatically, and implied volatility has spiked, even while the shares themselves have been consolidating around their 52-week high level.

During the past 20 trading days, just about 2,000 Medtronic, Inc. puts have been bought to open on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This compares to more than 13,000 calls. Panning back a bit, the 50-day call/put volume ratio at the ISE/CBOE/PHLX stands at 3.59, in the 83rd annual percentile. In other words, buying demand for calls has been healthier than usual during the past 10 weeks. The 10-day call/put volume ratio of 10.91, meanwhile, is in the 92nd annual percentile, suggesting that this demand is even stronger on a shorter-term basis.

Looking beyond February-dated options (which expire today), the near-the-money March 47 strike is home to peak call open interest, with nearly 17,000 contracts in residence. Very little attention has been paid to the April series, meanwhile, but the May 49 and 50 calls have approximately 9,100 and 11,000 contracts open, respectively.

On the charts, while Medtronic has gained roughly 14% so far this year, it has taken a notable breather during February. In fact, since Feb. 1, the stock has not moved lower than $46.23 or higher than $47.40 (incidentally, a new annual high).

Even while realized volatility has been feeble, implied volatility has shot higher. Schaeffer's Volatility Index (SVI), for example, has advanced to 0.25 -- higher than 87% of the past year's readings -- from an annual low of 0.13 in early January. Also, the stock's 30-day, at-the-money implied volatility reading, as reported by Trade-Alert, hit a new 52-week high this morning.

Analysts, on average, are expecting the medical equipment name to have earned 91 cents per share in its fiscal third quarter. The company has a mixed record in the earnings confessional, having missed expectations twice, matched once, and exceeded once during the past year. It is possible the recent call buyers have been stocking up on positions (and driving volatility higher) in hopes of an out-of-the-ordinary earnings report on Tuesday morning. Then again, given the specific attention paid to the later-dated May options, there may be other developments lurking that these speculators are hoping to exploit.


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