INTC by optionpit

------------------------------------------------- INTC by optionpit----------------------------------------------------------------------------------

One of the things my options mentoring students often ask me is: 'How should I evaluate earnings?" My first answer is "I follow the option paper flow." My second answer is I look at the volatility to make the most favorable bet. I am not going to write a long blog on paper reading. It’s hard to really explain in written form, and so if you want to read option order flow, sign up for one of the courses or listen to the AM Pit Report. If you want to learn how to evaluate implied volatility read below.

The first thing I do is look at the straddle price:

At .90 that implies less than a 5% move, not just for earnings coming up this week, but for the rest of the cycle. A full 5 days of trading beyond the earnings announcement. If we look at how Intel has moved after earnings announcements it has hit or exceeded .90 of movement on several occasions. Beyond that, the stock has moved more than .90 on its own in a week several times.

The 30 day IV is still not elevated to where it has gotten over the last couple of announcements, something that would make sense if we consider the low realized volatility in the market right now (which also brings low IV). If we look at the lowest 30 day implied volatility over the last 6 months, which is about 21.5%, that would imply a 10 day standard deviation of .75. Is this earnings cycle only worth an extra .15 over the lowest volatility Intel has had in the last 6 months? My answer is no. My second thought is that even if INTC doesn’t move .90 the likelihood of losing the entire premium in the straddle is really low. All and all, this does not seem like a bad bet. However, we have one more thing to check.

I need to the inter-month volatility skew, if the front month is overly elevated I might buy the back month, despite my arguments above, if February or March are seemingly even cheaper than Jan, I might buy one of those months instead. Example, suppose I could buy the Feb straddle for 1.15, that would be a better buy than the Jan straddle for .90. In this case, with this short of a time to expiration I would expect IV of an earnings cycle to be drastically elevated, I would not call 4% above the next month out 'drastically elevated'.

Based on the criteria above, I would lean toward buying premium in this stock. Not having a directional bias, .90 for the straddle seems like a bargain to me. I would lean in that direction. On Thursday morning I will run through Intel's paper flow in the morning briefly (during the AM Report), and extensively during the PM report (for a special deal on that email us, info@optionpit.com). I would note though that even if I have a lean, I still might decide not to pick a direction. The Jan straddle for .90 is simply may be too discounted.

For those that are saying that things are not moving right now (low market HV), take one look at NVDA and tell me that a chip maker can’t move.

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