$HPQ Fiscal Q3 Earnings Cheat Sheet

by Enis August 19, 2014 3:29 pm • Commentary

Event:  HPQ reports its fiscal Q3 earnings on Wednesday after the close.  The options market is implying about a 5% one day move, which is quite a bit lower than the 4 qtr avg of about 7% and the 8 qtr avg of about 9.75%.

Sentiment:  Wall Street analysts are more neutral on the stock than they were one year ago, with 16 buys, 19 holds, and 2 sells, with the average 12 month price target slightly above the current price, at around $36.70.  A year ago, there were only 8 buys on the stock.  Short interest is only around 1.5% of the float, vs. closer to 5% in late 2012.  HPQ is up 27% year-to-date.

Options Open Interest:  Total open interest favors puts over calls by a ratio of 1.1 to 1, despite the overall strength in HPQ over the past year.  Recent volume has favored calls, as the one month call/put ratio is around 1.5 to 1.

The Sept 36 and Nov 36 calls both have over 10k of open interest.  The bulk of the open interest is in Jan15 expiration, but most of that is in much lower strikes.  The Jan15 30 strike is the closest relevant strike, where both calls and puts have over 18k of open interest.

Price Action / Technicals:  The monthly chart in HPQ shows the volatility of the stock over the past 15 years, but after all that movement, the stock has basically ended up in the same place it was in August 1999:

HPQ monthly chart, Courtesy of Bloomberg
HPQ monthly chart, Courtesy of Bloomberg

However, I was quite surprised when I pulled up the daily chart of HPQ, which is a name that I had not looked at in many months.  HPQ’s uptrend over the past year has been very steady, holding above the rising 50 day ma for much of that time:

HPQ daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
HPQ daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The high of the year from late July is $36.21.  The 50 day ma is now around $34.65, and the stock has held above that level for almost the entire period since mid-October.  The rising 200 day moving average is around $31.

Volatility:  The implied move for earnings of only 5% for HPQ is well below both the 4 and 8 quarter averages.  However, options traders have re-priced implied volatility lower even with the earnings event since recent realized volatility in HPQ has been so low, reaching a 2 year low in the past month:

HPQ 30 day implied volatility (blue) vs. 30 day realized volatility (white), Courtesy of Bloomberg
HPQ 30 day implied volatility (blue) vs. 30 day realized volatility (white), Courtesy of Bloomberg

As a result, if the earnings event does not move HPQ, 30 day implied volatility is likely to fall below 20 as traders anticipate more of the same in terms of a tight, grinding range.

Buying the move seems cheap but that’s because the stock has been so predictable during this rally. We’ll check back in tomorrow before the report and see if we want to play for the possibility that the predictability ends.