Intuitive Surgical (ISRG, $96.69, down $3.28) is testing its 52-week low again which was set last Thursday at $96.17. I profiled the February 90 puts (AXQNR, $4.20, up $0.10) on 1/9 at $4.50 and as you can see, they are slightly lower from our entry price. The three-day weekend knocked some time premium off the options which is one of the risks of owning an out-of-the-money put.
The stock managed to hang on to the $100+ level longer than I anticipated and has been range bound from $96 to $104. The market’s ability to hold key levels rubbed-off on the stock and we got a tough choice to make. The dilemma we face is that Intuitive Surgical will be reporting earnings this week on Thursday.
The stock is highly volatile, especially around earnings, and averages a one-day change of 15% following its earnings announcement. At current levels, that will put the stock at $82 or $110 by Friday. Even a 10% swing gives us a $10 move in the stock.
If the stock hits $82 on a lousy earnings report, the February 90 put options will be worth at least $8, or a double from current levels. If Intuitive Surgical manages to wow Wall Street with its earnings or they come in better-than-expected, the stock could rally back over $100 and the options would take a big hit. At least a 50% loss.
One could argue that these are the riskiest of trades but if you have had a good year so far then you may be willing to roll the dice. That’s how I feel. You could limit your exposure though. If you have 10 contracts, you could cut it back to 5…
Once you get into managing your own option portfolio, these are the choices you have to make to protect capital or decrease your risk in case a trade hasn’t worked exactly as you had planned. I think there is a good chance ISRG misses but there’s nothing wrong with cutting back your exposure while still going for the fences.