Chris Tyler, Optionetics.com
April 18, 2011

Semiconductor heavyweight Texas Instruments (TXN) reports after Monday’s closing bell. Analysts expect the company to post profit growth of 11.50% on earnings of $0.58 per share and sales of $3.39B versus last year’s take of $2.08B.

In front of the release, boutique broker Sterne Agee wrote a mixed research note. Analysts there trimmed first quarter estimates slightly below Street views based on near-term risks tied to Japan. However, the firm does see longer-term growth opportunities based on the company’s OMAP 4 and 5 processors for the smartphone and tablet markets.

Technically speaking, there are “near-term” risks but also possible rewards as well. Isn’t that always the case though? Looking at the daily chart of Texas Instruments bulls are challenging the 50SMA from below. For the past few weeks that line has remained key resistance as the stock carves out a bearish-looking flag pattern.

For his part, our friend PS Elliott sees TXN as a bullish setup. If an estimated TAPP zone is to be proven correct, any potential bear flags and moving average resistance will be proven short-lived as the stock makes its way towards a mid TAPP north of $40 a share by early June.

Figure 1: Texas Instruments (TXN) Daily Chart

And what does today’s option traders appear to be thinking or actually doing? Checking the board today and very equal volume of 1,300 in the July 37 call and 33 put suggest either a strangle, collar or risk reversal has been put up. With heavier open interest and bid but not over the top premiums, it’s honestly quite difficult to determine which strategy, which side the customer(s) is on and whether we’re looking at an opening or closing transaction(s).

Atop the volume board today and mostly as one might expect, the front month May contract has been busier than normal. Most active and by “crowd proxy”, continued and slightly elevated front month premiums coupled with rather evenly-split call and put volume of 2,100 and 2,300 contracts in the at-the-money May 35 strike suggests, option hedge hogs could be playing the long straddle for an earnings-related move.

Annotated above by the “X’s” in Figure 1 is where long straddle players would break even at expiration, if the delta neutral but vega and increasingly theta sensitive strategy was held for the full 32 calendar days remaining. For the more theoretically inclined willing to hedge more dynamically throughout the life of the spread, premiums near 26% IV suggests traders are confident shares of TXN will remain within 8% of current levels around 35 until expiration using a likelihood of 1SD or degree of confidence of about two-thirds.

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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