We're winding down a busy week of earnings, but don't fret as next week brings us a bevy of huge names.
I'd call yesterday's analysis a bit of a split. Qualcomm (QCOM) has finally broken its long losing streak. Guessing when a trend is going to end is a tough business; however, the view that volatility was underpriced proved accurate. The maximum move of just over 8% is exactly in line with predictions and the stock has traded higher from where it left after hours, so overall, opportunities were there for volatility and after-hours traders, but playing the directional trend was not the correct call. As I've discussed before, though, using regressional analysis (RA) is about targeting the size of a move, not the direction. QCOM played out very well. Intel (INTC) has moved in line with options and slightly beyond my view of the RA, although nothing painful came from that analysis. (Qualcomm is part of TheStreet's Dividend Stock Advisor portfolio.)
Starbucks (SBUX) and Skyworks (SWKS) showed some interesting RA last night and both offered something different than what we've seen thus far, so I thought they would both be worth a quick look. I do have an option trade on SBUX into earnings, and you can see the trade outlined on Real Money Pro today. Starbucks is pricing a move a bit over 4% tonight, but we've only seen moves that large one-third of the time over the past two years. I'd be hard-pressed to find any trend here, though. The best-fit line really doesn't fit much at all. (Starbucks is part of TheStreet's Action Alerts PLUS portfolio.)
The only pattern, and I use that term loosely, I might be able to outline are the lackluster reactions we've seen appear twice in clusters of three. If that continues, then we should see a 4%-5% reaction post-earnings. The overall trend, though, has been for single-digit percentage moves post-earnings, so targeting a move about 7% is calling for something of a very low probability and no recent history to support it. I see this one playing out more like Microsoft (MSFT) .
SWKS is a bit more interesting as we have options expecting a move of 6.5% to 7% today, and that falls right in line with the last five reports. In fact, if I were to ignore any reports beyond the most recent five, we've get a line that matched nicely with expectations and the trend would be right in line rather than declining and looking for a move in the 5%-6% range. I view this one a bit differently, almost in a coiled fashion. We've been so consistent for so long now and have options lining up with that consistency that I believe we'll break. This feels like a time where we return to the 2% move or the 10%-plus move. In other words, expect the unexpected.
This is where I would lean more toward a lottery-ticket type of play. Understand that lottery tickets can be the expectations of a big move or virtually no move when there is a decent expectation of volatility priced in. Selling a straddle to buy a far out-of-the-money strangle is as much a lottery ticket as buying a far out-of-the-money call or put spread.