Name That Trade – INFY Reports Earnings Tomorrow

by Enis October 11, 2012 2:25 pm • Commentary

Infosys is the original call center stock (based in Bangalore, India), when outsourcing fears were running rampant last decade.  It’s a $27 billion market cap company, so no slouch.  The company has diversified since the late 1990’s, turning into a broader consulting company for businesses, and that’s about the extent of my knowledge in INFY.  In fact, I haven’t ever traded a single option in the name, but Kristen pointed out that the stock was reporting earnings tomorrow, so we took a look at potential opportunities.

The at-the-money straddle ($47.50) is implying a 8% move for earnings tomorrow.  The stock has averaged 7.75% the past 4 quarters, and 7.5% for the past 8 quarters.  But part of the reason the term structure looks intriguing is that options traders are clearly expecting November implied volatility to come in substantially, whereas macro factors might lead to more volatility in the next month (elections, portfolio adjustments before year-end, fiscal cliff progress or not, etc).

Here are Oct and Nov options:  



With Oct 47.5 strike options at 70 implied volatility, and Nov 47.5 strike options at 43 volatility, the forward volatility that traders are expecting between Oct and Nov expiry comes out to 33 (you can use our Implied Move Calculator for this here).  While that seems fair by historical standards, again, I think the next month is unusual in terms of potentials for movement in the broader market.

One potential trade that would essentially sell the 8% earnings move, but still provide decent risk/reward in the case of being wrong (and potentially set up for more volatility in November):

-Sell the Oct 47.5 straddle around $4

-Buy the Nov 42.5 / 52.5 strangle for around $1.70

Unfortunately bid/ask is quite wide in INFY, and since I haven’t traded this name before, I’m doing nothing on it today.