THE WEEK AHEAD: TEVA, BIDU, RIG, XOP
BIDU (44/42), RIG (33/56), and TEVA (49/53) announce earnings this week, with TEVA looking for a March to April volatility contraction of about 15%, BIDU, approximately 7.7%, and RIG, 6.9%. Instead of looking to play these pre-announcement for a volatility contraction (the contraction percentages aren't that compelling), I'll look to potentially short put/acquire/cover instead,* particularly since all of these underlyings have been hammered of late and are at the low end of their 52-week ranges.
Pictured here is a Plain Jane, TEVA 20-ish delta 16 short put in the April expiry; it's paying .51 with a break even of 15.49. The more aggressive 30 would be at the 17 strike and is currently paying .79 with a 16.21 break even. On margin, the 16 short ties up about 320 to put on, the 17, 340, with respective returns on capital of 16% and 23% at max. The break evens represent a 15% discount over current price for the 16 short put; an 11% discount for the 17.
The BIDU April 18th 155 (25 delta) is paying a 4.55 credit with a break even of 150.45, a potential 14.7% return on capital at max and a 11.4% discount over current price if assigned. As with TEVA, there is little point in holding shares if you don't have to, since it does not pay a divvy. If you end up in-the-money, roll as is and proceed to sell calls against to reduce cost basis.
If you're not into tying up 31.00 in buying power on Baidu, there is RIG. Unfortunately, due to its size, you're going to have to go closer to the money to make it worthwhile in dollar and cents terms: the April 15th 8 short put (40 delta) is paying .57 with a break even of 7.43 -- a 35.6% potential return on capital at max and a 10.3% discount over current price if assigned.
On the exchange-traded fund front, not much is hopping from a premium selling standpoint with VIX dropping into the 15's from its 2018 year-end highs of 36+, so I'll be looking to hand sit and keep powder dry for a higher volatility environment to get into nondirectional setups in broad market instruments. That being said, I will continue to sell premium in XOP, where the 30-day implied is over twice that of the broader market (34.1% versus SPY 15%).
* -- The natural alternative should you not be interested in acquiring shares would be to roll the short put out in time "as is" if it hasn't worked out and then proceed to cover with a short call. The last two dividends were a paltry .07, so I could see not wanting to tie up buying power to be in the shares unless you absolutely have to.
Pictured here is a Plain Jane, TEVA 20-ish delta 16 short put in the April expiry; it's paying .51 with a break even of 15.49. The more aggressive 30 would be at the 17 strike and is currently paying .79 with a 16.21 break even. On margin, the 16 short ties up about 320 to put on, the 17, 340, with respective returns on capital of 16% and 23% at max. The break evens represent a 15% discount over current price for the 16 short put; an 11% discount for the 17.
The BIDU April 18th 155 (25 delta) is paying a 4.55 credit with a break even of 150.45, a potential 14.7% return on capital at max and a 11.4% discount over current price if assigned. As with TEVA, there is little point in holding shares if you don't have to, since it does not pay a divvy. If you end up in-the-money, roll as is and proceed to sell calls against to reduce cost basis.
If you're not into tying up 31.00 in buying power on Baidu, there is RIG. Unfortunately, due to its size, you're going to have to go closer to the money to make it worthwhile in dollar and cents terms: the April 15th 8 short put (40 delta) is paying .57 with a break even of 7.43 -- a 35.6% potential return on capital at max and a 10.3% discount over current price if assigned.
On the exchange-traded fund front, not much is hopping from a premium selling standpoint with VIX dropping into the 15's from its 2018 year-end highs of 36+, so I'll be looking to hand sit and keep powder dry for a higher volatility environment to get into nondirectional setups in broad market instruments. That being said, I will continue to sell premium in XOP, where the 30-day implied is over twice that of the broader market (34.1% versus SPY 15%).
* -- The natural alternative should you not be interested in acquiring shares would be to roll the short put out in time "as is" if it hasn't worked out and then proceed to cover with a short call. The last two dividends were a paltry .07, so I could see not wanting to tie up buying power to be in the shares unless you absolutely have to.
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