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Must Knows

• HCL technologies gained around 3.6% in the June series with a rollover of 89% v/s a 3-month average of 83.7%, indicating short covering.

• For the current expiry cycle, the stock is down 4.8% with open interest up 18.7%, indicating that short positions have been built.

• The current 30-day Implied Volatility (IV) is at 25.1% (12-month average is 24.5%); The reading is at the 65th percentile, which means that 65% of the time in the last one year, volatility has been lower than the current value. In other words, ATM options are somewhat expensive.

• The measure has ranged between 17.9% and 46% over this period.

• Currently, the difference between the 30-day IV and similar tenor HV (Historical, or past volatility) is at 11.8% (12-month average: -1.1%), which is around 8 standard deviations from the mean spread; this means the market is discounting greater price swings ahead of earnings, due today.

• The spread between IV and HV is at the 99th percentile, which means 99% of the time it has been lower than 11.8%. This means that if the earnings are not materially different from consensus estimates, option prices will fall rapidly.

• The earnings implied one-day move as per Bloomberg model estimates is 0.8%.

• Compared with one week and one day ago, 5% OTM calls have fallen more compared with 5% OTM puts; this shows bearish positioning from traders.

• The July 1700/17200 calls have significant gamma exposure, meaning that if the spot comes near this zone, it could lead to even greater volatility.

Stock Performance One Day Before Earnings and One Day After

Option Strikes Concentration

Observations:

• View: Bearish based on positioning and the options skew. That said, the stock sits near vital support around 1600.

• Seasonality: In July, the stock has risen 60% of the time, returning 5.7% on average – making it the best performing month for the stock. Breaking it down by week, we can see that in week #29 (current week), the stock has risen 1.6% on average and has gained 70% of the time. Therefore, the weight of the evidence makes us believe that any earnings-related dip won’t be sustainable. Expectations are for weak numbers, but if the actual earnings are a shocker and the stock ends below 1600, the 1480 – 1530 area may be the next downside objective.

• Technically speaking, the stock has the 100-day average offering support near 1600 while the 200-day average is hovering near 1700.

• Recent price action: Stock was down on Friday, its fifth straight drop – the last time that happened was on April 7th, when the stock bottomed at 1287.

• In conclusion, we suggest the following Bull Call Spread:

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