Sunday, January 5, 2014

INFY - Setting up Earnings Trade

Infosys historically has shown volatile movements after the earnings release.  Stock has moved close to 8.2% on an average after earnings release for last 12 quarters.  Table 1 below presents the implied volatility levels for first two months before earnings, expected volatility crush after earnings release, stock and at the money straddle performance. 

Implied volatility levels, straddle pricing, stock and straddle performance

Currently, at the money straddle for options expiring on January 18 is pricing a move of 8.4 % in the stock (Close to 12 quarter average move).  30 day and 60 day implied volatility levels shown in figure 4, present fair pricing of options. After converting straddle prices into standard deviation terms, these options seem to be fairly priced as we approach earnings on Friday.  

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