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Earnings play in STLD

STLD reports today after the bell and I want to take a position to capture some possible upside. Looking at the front month straddle the options market is pricing in about a 10% move on earnings. So here is what I am going to do. I want to buy the Mar '10 $16 calls and sell the March '10 15 puts to enter into a "risk/reversal" or "synthetic" (skipping one strike down). I chose $15 to sell as this seems to be a level that the stock may have bottomed out.

In recent weeks STLD made a run to a new 52 week high of over $20 per share. Since then it has had a 25% pull back. Analyst are forecasting $1.37 per share for earnings next year giving this one an attractive p/e of about 11.67. Now keep in mind that these estimates bet on the continuation of the recovery. I point this out as I am willing to take delivery of these shares at the $15 level.

Here is the daily chart:


Notice that I have also plotted the HV and IV on the lower studies of the chart. There is only a 3.8% difference betweeen HV and IV. Which to me kind of seems cheap considering the options market is pricing in a 10% move based on the front month ATM straddle which is trading for about $1.5. So I don't think I will have to worry about much of a volatility crush after the release of earnings.



Next we have the risk profile fof the trade: I bougth 5 Mar '10 16/15 synthetic's long (Buying the $16 calls and selling the 15 puts) for a net debit of $0.40 per synthetic.




Above I provided a bunch of price slices as to what this thing might do. Since I am not too concered with a volatility crush because one there is not that big of a difference.

Next I took the distribution of Open Interest for Feburary. Since about 1/19 Open interest has been increasing on both call side and puts side. But the ratio of calls to puts is 1.54:1. So options players are indicating a bullish bias into earnings. $17 looks to be the home of the highest open interest and my act as a gravitational pull if earnings are good.


Currently the stock is trading at $15.89 going into the close. The estimate that the street is looking for on EPS $0.17 on Rev's of $1.08 Billion.

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