Naz’ 100 (QQQ) constituent and erstwhile computer hardware manufacturer Dell (DELL) is seeing heavy but mostly run-of-the-mill option volume in Tuesday’s session and directly in front of this evening’s earnings release. Analysts expect profits of $0.52 per share. That’s a penny below the prior year’s $0.53, while revenues of $15.97B are expected to slightly surpass that same period’s $15.69B in sales.
Intraday, 42,000 contracts have changed hands and double its daily average. Roughly 80% of that volume has been in the newly-appointed front month contract of March with puts holding favor by a slim 1.15-to-1.0 margin. The fairly well out-of-the-money March 16 put has seen the largest concentration of interest.
Volume of 8,700 in the March 16 put compares to open interest of about 6,500 and suggests at some fresh initiating of positions. However, fairly decent-sized activity in both the at-the-money 18 and 17 strike puts could point to hedging activities with the likes of a bear or bull vertical as a potentially popular position rather than an outright bet on the 12 delta put; which in of itself, looks risky for both buyers and sellers.
Figure 1: Dell (DELL) IV Historical with Earnings
With shares near 18.15, the expected move based on the use of the ATM March 18 straddle and March 17 / 19 strangle has the report priced for a reaction of up to $1.47 + $0.68 = $2.15 / 2 = $1.07 or about 6% in shares. Looking at premiums through implied volatility, current 40% IV suggest a 68% or 1SD chance DELL will remain within 10% of current levels through expiration. That’s higher than 3 of its 4 last reports which yielded immediate moves of about 2% to 5% but below last February’s near 12% upside reaction thrust.
Shown above in Figure 1, whether or not traders and their averaged consensus of a 8% stock reaction through expiration is accurate, we can determine a volatility crush is forthcoming. Despite implieds in the lower third of their yearly range, we’d estimate that based on longer-term volatility near 30% and recent lows near 20% for short-term premium, the March contract is likely to find itself in the mid-20s come Wednesday’s session.
Figure 2: Dell (DELL) Weekly
Technically speaking, Elliott Wave’s ProfitSource is suggesting a situation which appears near exhaustion for bulls. The weekly chart appears to show the last vestiges of a Wave 5 leg just below a TAPP zone. At the same time, the daily is flirting with a completion of a potential W3 with an overbought daily RSI 13 reading.
On the other hand and in other technical schools of thought, a massive weekly breakout secured from $17 - $17.65 does hint at much higher prices. If we were to project the size of the 2.5 year breakout from Dell’s inverted Head & Shoulder pattern, a conservative estimate would be for a minimum move towards $22 or $23. The speed of that type move though, does seem destined to require multiple catalysts and not just one potentially well-received earnings report.
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.
