ROVI Earnings Play

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Current Trades:

Current Payout:
Strategy:
February premium ATM calls are trading at over 80% volatility so 1 FEB 65 CALL and 1 FEB 70 CALL were shorted into earnings to collect premium against the long MAR 65 CALL bought on 1/28/11. In the event that ROVI misses earnings and the stock drops below 65 until Friday expiration then premium of 2.15 is collected lowering the risk of the MAR 65 CALL from 4.80 to 2.65 (2.40 * 2 = 4.80; 4.80 – [1.40 + 0.75]).

The MAR 75 CALL was bought today for two reasons:

  1. Unlimited upside potential in the event of higher than expected reported earnings
  2. Gives me more flexibility in the future if I want to put ROVI gains into a neutral spread (if the price of the 75 CALL drops then I can add one for cheaper to lower the basis and leg into the spread when price recovers; if price goes up then the deltas in the 70 strike will increase faster than the 75s so I can short 4 70s to offset the 75 CALL to spread the position; or at that point I could sell 1 65, and 2 70s for a spread)

Goal:
Lock in profit with potential for further gains.

Deltas for 70 and 75 MAR CALLS are .33 and .16 respectively when ROVI trades at 65.40. If a butterfly spread is legged on at 66.50 the premium will be approximately 2.00 and 0.90 respectively for the 70 and 75 CALLS. The benefits of this are as follows:

  • It would free up capital of $710 for other trades
  • The butterfly is on for a credit so the maximum risk of loss is a gain of $165 (if the stock closes at 65 > close > 75)
  • The maximum profit potential is $1,165 (if the stock closes at 70)

Anticipated Payout:

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