2ndUpdate: HPQ- Buying the Move Into Earnings Aug 18th. Implied Move Looks Fair to Cheap

by Dan August 8, 2011 3:08 pm • Commentary

Update Aug 8, 2011:  I am closing The Aug 34/31 Put Spread that was .65 in the money that I essentially legged into for .78 and was in the money.  I am selling this at 1.95 with the stock at 31.24.  I think the stock is very oversold as is the market and going to take my gains and move on. 

Update Aug 4, 2011: With HPQ now below the Aug 34 Put  ($33.35) that I am long And 8% away from the Aug 36 call strike I am long, I am going to sell the Aug 36 call at .26 and look to leg into a Put Spread.  The chances of making money on the call strike are not great down here and if I sell a lower strike put against the Aug 34 Put that I am long then I can lock in some of the .33 profit I have so far in the strangle and increase my chances of success.

So I am going to sell the Aug 31 Put at .33 to create the Aug 34/31 Put Spread.

-Let’s do the math; I paid 1.37 for the strangle, now worth 1.70, up .33 , I have taken off the call strike for .26 and now locked in .33 with the lower strike call.  So I have essentially reduced my risk by .59 (.33 for the Aug 31 Put, and .26 for the Aug 36 call)….so if you take my intial debit of 1.37 strangle less the .59 I am only risking .78 for the Aug 34/31 Put spread that is .65 in the money.


Original Post Aug 2, 2011:

HPQ: Buying the Move Into Earnings Aug 18th. Implied Move Looks Fair to Cheap

HPQ ($34.80)  reports their fiscal Q3 on Aug 18th after the close.

-The options market is currently implying about a 5%  move following earnings vs the 4 qtr average move of about 5.3%.   [private]

-Stock is one of the worst performing names in the Dow Jones Industrial Avg down 17% ytd and down almost 30% from this years high.

-Technically the stock is sitting at a massive support level dating back to mid 2009 and about to complete a huge wedge.

[caption id="attachment_3729" align="aligncenter" width="300" caption="3 Yr HPQ chart from Bloomberg LP"][/caption]


MY VIEW: company has had its share of problems dating back to last summer when they abruptly lost their CEO savior Mark Hurd, coupled with some substantial earnings misses.  They might have lowered their guidance just enough given their rock bottom valuation that any good news could send the stock back to $40, but any continued mishaps and you could see a final puke similar to that of  RIMM or NOK.  I think there is a distinct possibility that the stock moves given the high level of uncertainty regarding the name….Wall Street analysts are mixed with with 17 Buys, 22 Holds and 2 Sells.

-Vols look fair as we head into the earnings event, with at the money implieds offered at about 32.50 vs the 60 day realized of about 25.  I want to Buy this implied move.

2 trade suggestions if you agree that earnings could cause the stock to move: 

TRADE: HPQ ($34.80) BUY Aug 34 / 36 Strangle for 1.37  (I just bought this small not high conviction but I like owning this vol especially when you consider the potential for a near-term puke in the overall market, also very interested in Put Spreads)

-Buy Aug 34 Put for .74

-Buy Aug 36 Call for .63

Break-Even on Aug Exp:

Upside: btwn 36 and 37.37  lose up to 1.37 above 37.37 (up 6.5%) have unlimited profit potential

Downside: btwn 35 and 32.63 lose up to 1.37, below 32.63 (down 6.5%) have profit potential to zero.

Worst Case: btwn 34 and 36 lose 1.37

Likelihood of losing all the premium isn’t great as one of those options is probably going to be in the money even if the stock doesn’t realize an out-sized move.


OR Pick A Direction, My Choice would be down, commit small amount of premium and play for a puke.

HPQ ($34.80) Buy the Aug 33/31 Put Spread for .32

-Buy Aug 33 Put for .49 and

-Sell Aug 31 Put at .17

Break-Even On Aug Expiration:

Downside: btwn 33 and 32.68 lose up to .32, btwn 32.68 and 31 make up to 1.68 and below 31 make full 1.68 or over 5x your money.

Upside: 33 and above lose .32


***check  back as I am going to do a deeper dive on the fundamentals.