Amgen (AMGN) will report Q3 results tonight after the close. The options market is implying about a 3% one day post-earnings move on Thursday, which is actually shy to the average over the last 4 quarters of about 5%, but basically, in line with the 10-year average. With the stock around $180, the Oct 27th weekly 180 straddle (the call premium + the put premium) is offered at about $6 (or about 3.3%, most this is priced for Thursday’s movement) if you bought that, and thus the implied move you would need a rally above $186 or a decline below $174 to make money by Friday’s close.
Shares of AMGN have been volatile so far this year. Despite its 23% ytd gains, the stock has traded in a wide range that included big swings up and down. Up and down volatility not too dissimilar than the price action over the last few years:
From purely a technical standpoint the stock’s recent breakout to new all-time highs was important. Yet the stock’s recent 7% decline could prove to me more so, as it is very close to signaling a failed breakout. That might put the stock back in the multi-year purgatory from late 2014.
Despite Wall Street analyst consensus calling for record sales and earnings per share in 2018, the stock trades at a steep discount to the broad market at just 14%, likely the result of decelerating eps growth from high single digits this year to low single digits next on flattish sales growth. AMGN will likely need to make an acquisition in the coming months as some of their cash cows like Embrel are facing stiffer competition.
Volatility isn’t particularly high historically but 30 day IV is much higher than 30 day realized right now. So most premium in options right now is pricing in the event itself.
So What’s the Trade?
For those already long the stock the implied move can be helpful here. The implied move of about 5.25 (with the stock 177) would put the stock at about 182 and change on a move higher in line with market expectations. But with the stock down $3 on the day and the previous highs near 190 I think it makes sense to go a little higher on any call sale. The Oct27 weekly 185 call can be sold at .60, and used to finance downside protection. The Oct27th weekly 175/167.5 put spread is about 1.15. So that put/spread collar costs about .55 and offers up to 6.95 in protection below, and the only risk on the upside is losing profits above 184.45, a move a few dollars higher than the expected move.
Also for those already long the stock, there’s also the opportunity to add leverage on a move higher. The Oct27th weekly 182.5/185 1×2 call spread is about even money (buying one 182.5 call, selling two 185 calls). On a move above 182.50 (in other words, above the expected move) this overlay adds up to 2.50 in leverage. So if the stock went to 185, it would be as if the stock went to 187.50 and you would have added 2.50 in additional profits. Profits stop above that level, but a move above 185 is low probability and it’s not until a move above 187.50 before you’re actually losing any profits. If that’s a bit tight the strikes can be a little higher, with the 185/187.5 a small credit.
These are overlays based on AMGN into earnings but the strike selection lessons apply to any stock into an event. All of these are low cost (or no cost) and use the information provided by the market in the expected move. The expected move is no guarantee of price action, the greatest odds are always no move at all, but they tend to be self fulfilling prophesies in a disproportionate fashion on moves higher or lower as those are areas where traders have already targeted for technical reason and have lined up options bets.