Consumer durables staple or umm, washer and dryer giant Whirlpool (WHR) is set to spin its fourth quarter earnings on investors Wednesday morning. Consensus views from analysts peg earnings at $2.15 per share compared to last year’s $2.11 on revenues of $5.01B versus $4.86B.
In front of the report, option traders gave their own indication of expectations through their collective actions. Volume spiked to 13,400 contracts, it’s second heaviest since its last earnings period. At the same time, Whirlpool’s put/call swung to its highest reading since early last year with a reading of 1.78.
Most active on the board, about 2,500 out-of-the-money February 48 puts changed hands compared to much larger open interest approaching 10,000. Priced mid-market for $0.53 on implieds of 57%, a naked long purchase would require a maximum move of 14.50% by expiration in order to double in price.
Digging a bit deeper into Tuesday’s trading; activity was concentrated in the February contract with a couple stray pockets of action such as 600 contracts put up in the well out-of-the money 20 delta September 70 call. We’re less than sure of the initiating party’s intentions, but we’d gather it could be a hedge for a closer-in contract and we suspect it’s not part of a buy-write or ratio-write strategy due to its position relative to shares and hefty amount of time on the calendar for less than 3% premium taken in.
Figure 1: Whirlpool (WHR) Implied Volatility
Underlying volatility is mostly middle of the road relative to the last twelve months. Implieds, with the exception of February, look mostly fair except when compared to WHR’s 6-day SV. Readings relative to the short-term stock gyrations are inflated due to some abnormally tight consolidation work the past couple weeks.
The ATM February straddle is priced for $4.70 with shares at 54.30. To breakeven at expiration, shares of WHR will need to be below 50.30 or above 59.70. Barring that type move and prior to the contract expiring, traders holding a long straddle can anticipate a volatility crush with its most detrimental impact felt if shares also fail to move away from the strike following the report. With recent range lows in the low 30s and similar statistical volatility readings, we’d conservatively guess that level to be challenged and perhaps even the 30% IV level.
As for past trader reaction in shares of WHR, the past two years have produced two large upside reactions of 8% and 10%, an even more substantial 14% bearish reaction, but the other five contained to immediate movement of about 1% to 4% and a bias to the downside.
Traders this quarter are estimating a move of up to $3.65 in shares base on a summed average of the February at-the-money straddle and surrounding money strangle. In tow, implied volatility of 49% for the straddle suggests confidence of 68% by traders that WHR will remain within a range of about $5.40 points or 48.90 to 59.70 through February expiration. Personally and based on the loose bag of old and mixed earnings laundry, we’re not sure who’s going to the cleaners tomorrow in Whirlpool.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
