WTW ($79.35 ) Got a few questions on the name as it has a been a big mover on earnings of the last 2 years, so we thought we would take a quick look prior to earnings.
EVENT: Company report’s their Q4 after the close. The Options Market is implying about a 13% move post earnings, which seems reasonable to the the trailing 4 qtr move avg of about 19%, but pratcially inline with the ~13.5% average over the last 8 qtrs.
IMPLIED VOLATILITY is high as one would expect heading into the event, but not exactly through the roof, with 30 day implieds offered at about 59 and 60 day at about 46, which are not extremely rich to the 30 day and 60 day realized vol of about 47 and 43 respectively.
-Today’s action in the options market, also as expected has been dominated in Feb expiration with a disproportional amount of the volume btw the feb 70, 67.50 and 65 puts. Options volume running over 3x normal daily volume.
PRICE ACTION / TECHNICALS/ SENTIMENT:
-The stock is up an astounding 43% ytd and now only about 9% from the all time high set last May.
-The Chart is a bit of a basket case with massive gaps all over the place, usually the result of earnings surprises/misses.
-Nearing $80, the stock is quickly approaching the upper end of a trend channel that could serve as some mild resistance, if it was any other day than earnings, with Short interest a tad over 20%, coupled with the stocks massive ytd rally we could see some fireworks following the print.
[caption id="attachment_8856" align="aligncenter" width="300" caption="14 Month WTW chart from Bloomberg LP"]
[/caption]
-Wall Street analysts are fairly mixed on the name with 5 Buys, 5 Holds and no Sells with an avg 12 month price target of $86.75.
EXPECTATIONS / VALUATION:
-Stock has benefited this year from seasonality as 40% of the their new subscribers join in the first quarter and the stock may be discounting some decent guidance in a year that is likely to show some tough comparisons yoy.
-The company is expected to close 2011 with eps growth of 62% and sales growth of 26%, but analysts expect those high growth rates to moderate some in 2012 to 12% and 7% respectively.
MY VIEW: This is by no means a company that I know well (as I am obviously not a customer!) but the volatility around past earnings events and the fact that the stock is already up 43% ytd is certainly enticing to the trader in me.
I guess there are 2 ways this thing is gonna go……
1st company beats and raises already high expectations and the stock makes a new all time high propelled by shorts climbing over each-other to cover, not to dissimilar to RAX today.
or
2nd The company disappoints the high expectations and the stock sees an out-sized move lower back to bwtn its 200 and 100 day moving averages somewhere in the high to mid 60s.
Buying the move would be extremely difficult with just 3 days left to Feb expiration and as always I think if you are inclined to play you probably have to pick a direction.
TRADES THAT I WOULD CONSIDER: BUT I AM NOT DOING EITHER AS I DON’T HAVE CONVICTION ONE WAY OR THE OTHER, BUT IT SEEMS SOME OF YOU DO!
BULLISH: If I WERE PLAYING FOR A NEW ALL TIME HIGH:
WTW ($79.35) Buy Out of the Money Call Spreads. BUY Feb 85/90 Call Spread for 1.30
-Buy 1 Feb 85 Call for 1.90
-Sell 1 Feb 90 Call at .60
Break-Even on Feb Expiration (Friday):
Profits btwn 86.30 and 90- make up to 3.70 (almost a 3 to 1 payout if you get a 14% move higher)
Losses of up to 1.30 btwn 85 and 86.30 and max loss of 1.30 85 or below.
OR
BEARISH: If I WERE PLAYING FOR A DISAPPOINTMENT:
WTW (79.35) Buy Out of the Money Put Flys. BUY Feb 75/67.5/60 Put Butter Fly for 1.65
-Buy 1 Feb 75 put for 2.80
-Sell 2 Feb 67.5 Puts for 1.40 total (.70 each)
-Buy 1 Feb 60 Put for .25
Break-Even on Feb Expiration (Friday):
Profits btwn 73.35 and 67.50 make up to 5.85, profit trails off btwn 57.50 and 61.65, max gain of 5.85 at 67.50 (down 15%)
Losses of up to 1.65 btwn 73.35 and 75.00 and 61.65 and 60.00