Chris Tyler, Optionetics.com
February 23, 2011
Dow component and computing giant Hewlett Packard (HPQ) has failed to “add up” for directional bulls Wednesday. Shares of HPQ are off a heady and technically-persuasive -10.00% after bulls collectively decided to harp on the company’s below-views guidance.
By the numbers, HP beat by $0.07 on earnings of $1.36 per share and growth of 23% over the year ago period. Profits however did come on the back of weaker-than-expected revenue growth of 3.6% with sales of $32.3B falling short of forecasts of $32.95B for the first quarter.
Looking forward, management expects Q2 EPS of $1.19 - $1.21 vs. Street views of $1.25 per share and sales of $31.4B - $31.6B versus consensus forecasts of $32.59B.
For its fiscal year 2011, Hewlett did raise its profit estimates but guidance of $5.20 - $5.28 per share merely matches current Street views of $5.24. Additionally and once more, the company reduced its sales outlook to $130.0B - $131.5B and below consensus estimates of $132.95B.
Technically speaking, shares of HPQ have been systematically crushed if we look at the loss of market cap, percentage decline and appreciate its newly-minted position below prior up-channel and Golden Cross supports.
Figure 1: Hewlett Packard (HPQ) Daily Chart
For the bulls still in the mix, embracing Fibonacci and prior pivot lows within the uptrend might hold some comfort. At a price of 43.25 or so, shares of HPQ are sandwiched between its 50% and 62% levels and still above what some might say is key support near 41 based on lows set during November and December.
Receiving less of a blow today, volatility bulls have done quite well all things considered. Those traders using strategies such as long straddles, strangles or backspread’s have profited rather easily from Wednesday’s surprisingly large fallout in shares.
Figure 2: Unhedged 10x March 48 Straddle HP (HPQ)
Trader estimates amounted to an over / under Vegas style line of about 7.70% for shares of HPQ through expiration. That benchmark price point was derived using the then ATM March 48 straddle priced on 30% IV and calculating the expected move based on a confidence level of 68% or 1SD. As much, with today’s noted much larger percentage gap and crap of -10%, hedging and locking in profits has been made rather easy.
Shown above is an illustrated +10 x March 48 straddle which closed last night priced at $3.05 per spread. With shares near 43 and making the position akin to a deep put worth nearly $5.00 intrinsically; the position is quite profitable but also in need of a long delta hedge to offset the profitable dirty work of gamma and built-up negative deltas.
In the new and improved here and now, depending on whom one asks of course, at-the-money implieds have dropped on the session but remain far removed from levels associated with a strong volatility crush. While uncertainty regarding the report has been reduced, overall fear in the broader market has helped keep both call and put buyers in the mix.
The current ATM March 43 straddle is priced at $2.25. That’s down $0.80 from last night but implieds have only slipped to 26%. At the same time, statistical range values have only ranged from the teens to about 21% during 201. Current levels are also still closer to range highs over that same period.
While it’s true the influence of the market may be pricing in a new normal of higher volatility in the coming months; premiums in HPQ seem advantageous for considering strategies that at least neutralize decay risk. The easiest such spread would involve either a bull or bear vertical; depending on a trader’s own technical prognostications. And for the more gung-ho, maybe the likes of broken wing butterfly would make sense?
Figure 3: HP (HPQ) May Broken Wing Butterfly
One spread of this type which may have caught the attention of the crowd or at least strives to suggest that by virtue of their collective action is the May 47 / 48 / 52.50 broken wing butterfly on ratioed 1 x 2 x 1 volume of about 18,000 total contracts. Shown above is a 5 lot to illustrate.
If the old adage of all gaps eventually getting filled occurs in a timely and very methodically manner, the broken fly would stand to do quite well. And if it takes longer than expected, the trader also stands to make a little something. However, in a world where the mad money sometimes quickly finds it has a case of Attention Deficit Disorder; some positions like the broken wing fly can quickly add up to a whole lot less "sense and cents", if not careful about making adjustments on the fly--so to speak.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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