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

Anadarko Petroleum's Straddles Are Interesting Before Earnings

Anadarko Petroleum Corporation (APC), an independent exploration and production company operating in three segments: Oil and Gas Exploration & Production; Midstream, and Marketing, is reporting earnings on Tuesday, July 26, after market close:

(Source: TD Waterhouse)

The company beat earnings estimates in 50% of time in the last eight quarters, underperforming in 50% of time, and has seen substantial volatility in the market price of its stock over the last three months:

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 August options are relatively cheap:

(Source: TD Waterhouse)

The monthly straddles (options with a strike price of $53.50) are worth around 8.4% 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 15.1% over the last 52 weeks, while the straddle expiring in a bit less than a month has an implied monthly volatility of around 14.0% (calculated based on 19 business days remaining until expiration), also including volatility from the earnings event this week. I therefore see signs of clear undervaluation in these options.

What do you think of this trade?