Hewlett Packard Enterprises (HPE) will report their Q2 results tomorrow after the close. The options market is implying about a 5.5% one day move following results, which is shy of its 6.5% average over the last four quarters but above the 4.5% average since its breakup from HPQ back in 2015.
The day following their Q1 results on February 23rd the stock rocked 10.5% to a new all-time high on better than expected results after a string of four earnings gaps lower in 2017. Despite the stock’s 10% pullback from its early March highs, the stock is up 21% on the year and has found a bit of technical support after filling in the Q1 earnings gap:
The cause for the Q1 earnings gap… a fairly impressive beat and raise, per BarronsOnline:
Revenue in the three months ended in January rose 11%, year over year, to $7.7 billion, yielding EPS of 34 cents, excluding some costs.
Analysts had been modeling $7.07 billion and 22 cents.
For the current quarter, the company sees EPS of 29 cents to 33 cents, above the average analyst estimate of 26 cents per share.
For the full year, the company sees EPS of $1.35 to $1.45, better than the consensus for $1.18.
A 9% revenue beat and a 50% eps beat in the quarter., while raising current quarter eps by 5 cents or 20% above expectations and the full year eps up 19%, which basically incorporates the beat and raise. Given the results from IBM and CSCO of late, I would be very surprised if HPE has a beat and raise to anywhere near the magnitude of the one in February.
If I had a directional inclination and wished to play for a move in line with the implied move and define my risk I would likely just use a $1 wide at the money call or put spread.
For instance:
Bearish: HPE ($17.50) Buy May 25th weekly 17.50 – 16.50 put spread for 35 cents
-Buy to open 1 May25th weekly 17.50 put for 50 cents
-Sell to open 1 May25th weekly 16.50 put at 15 cents
Break-Even on May 25th expiration:
Profits of up to 65 cents between 17.15 and 16.50 with max gain of 65 cents at 16.50 or lower
Losses of up to 35 cents between 17.15 and 17.50 with max loss of 35 cents at 17.50 or higher.
Or
Bullish: HPE ($17.50) Buy May 25th weekly 17.50 – 18.50 call spread for 35 cents
-Buy to open 1 May25th weekly 17.50 call for 50 cents
-Sell to open 1 May25th weekly 18.50 call at 15 cents
Break-Even on May 25th expiration:
Profits of up to 65 cents between 17.85 and 18.50 with max gain of 65 cents at 18.50 or higher
Losses of up to 35 cents between 17.50 and 17.85 with max loss of 35 cents at 17.50 or lower
The rationale for both: These trade ideas give very near the money participation at just 2% from the stock price and allows for potential gains of up 2x the premium at risk. While this is not generally a great risk-reward, into a potentially volatile earnings event this offers a defined risk way to play for this with a conviction on the direction of the post-earnings reaction.