Arcángel de Jesús Montoya
4
All posts from Arcángel de Jesús Montoya
Arcángel de Jesús Montoya in Money Trafficking,

Here Is How To Get Prepared For Red Hat's Earnings On Monday

Red Hat, Inc. (RHT) provides open source software solutions, using a community-powered approach to develop and offer operating system, virtualization, management, middleware, cloud, mobile and storage technologies. Red Hat operates through three geographical segments: the Americas, including the United States, Canada and Latin America; EMEA, including Europe, Middle East and Africa, and Asia Pacific. Its products and services include infrastructure-related offerings, application development-related and other technology offerings, and consulting, support and training services. Its infrastructure-related offerings include Red Hat Enterprise Linux, Red Hat Satellite and Red Hat Enterprise Virtualization. Its application development-related and other technology offerings include Red Hat JBoss Middleware, Red Hat cloud offerings, Red Hat Mobile and Red Hat Storage. Its consulting services include upgrade planning, platform migrations, solution integration and application development.

It is reporting earnings on Monday, March 27, after market close:

(Source: TD Waterhouse)

As evident from the above, the company has beaten earnings estimates in 87% of time and underperformed or showed in-line results in the rest of time. It has seen significant volatility and a strong uptrend in the market price of its stock over the last three months:

$RHT, RED HAT INC / D

The market participants expect the following numbers over the next few quarters, including the upcoming one:

(Source: TD Waterhouse)

Market data show that the one-week options are overvalued:

(Source: TD Waterhouse)

The one-week straddles (at-the-money options with a strike price of $83.50 and expiring on March 31, 2017) are worth around 6.2% of the current market price of the stock (including the calculation of the options' moneyness). Historically, the stock has been less volatile than that on a weekly basis over the last year:

(Source: Google Finance. Calculations by author)

As you can see, the stock has had a weekly standard deviation of around 3.5% over the last 52 weeks, while the straddle expiring in seven days has an implied weekly volatility of around 4.2% (calculated based on 7 calendar days remaining until expiration), also including volatility from the earnings event next week. I therefore see signs of overvaluation in these options.

Hence, selling the straddles is a good idea from a theoretical standpoint.