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

Take A Look At Canadian National Railway's Options Prior To Earnings Release Next Week

Canadian National Railway Company (CNI), which is engaged in the rail and related transportation business through a network of approximately 20,000 route miles of track spanning across Canada and mid-America, is reporting earnings on Monday, July 25, after market close:

(Source: TD Waterhouse)

The company beat earnings estimates in 88% of time in the last eight quarters, underperforming in the rest of time, and has seen some 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)

Note the wide deviation of expected financial results.

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 $60) are worth around 5.8% of the current market price of the stock. Historically, the stock has been almost as volatile as 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 7.3% over the last 52 weeks, while the straddle expiring in a bit less than a month has an implied monthly volatility of around 7.1% (calculated based on 20 business days remaining until expiration), also including volatility from the earnings event next week. I therefore see signs of clear undervaluation in these options.

What do you think of this trade?