Arcángel de Jesús Montoya
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Arcángel de Jesús Montoya in Money Trafficking,

Buy Honeywell's Straddles During The Earnings Call Today

Honeywell International Inc. (HON), a technology and manufacturing company operating in three segments: Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies (PMT), is reporting earnings today before the market opening:

(Source: TD Waterhouse)

The company beat earnings estimates in 87.5% of time on the last eight quarters (underperformed in 12.5% of time) and has shown swift movements in the market price of the stock:

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

(Source: TD Waterhouse)

On the other hand, market data show that the short-term options are relatively cheap:

(Source: TD Waterhouse)

The monthly straddles (options with a strike price of $120) are worth around 4.4% of the current market price of the stock. Historically, the stock has been more volatile than that on a monthly basis over the last year:

(Source: Google Finance. Calculations by author)

As you can see, the stock has had a monthly standard deviation of 6.1% over the last 52 weeks, while the straddle expiring in a bit less than a month has an implied monthly volatility of around 6.0%, while it also includes volatility from the earnings event today. I therefore see signs of clear undervaluation in these options.

What do you think of this trade?