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July 23, 2012 / redman59

Thoughts on Buffalo Wild Wings Earnings Trade

Going into tomorrow I am looking to take on an earnings trade with $BWLD.  First thing that I like to look at is its earnings history and reaction to its reported EPS and Revenue.  For this I pull up a table that I created with information derived from StreetInsider.com.

From this information from the last year of data, we can derive the following:

  • The straddle (or volatility) has been a profitable sale with the exception of one outlier (Q4 2011).
  • Price has been positive on a close to open basis except for Q2 2011 in where there was barely a change in price.
  • BWLD has a history of beating on EPS and Revenues with a small miss on the revenue

Next I like to look at the chart.  Not so much on a momentum indicator basis but on a volatility indicator basis.  Also I like to look at the chart structure and where support and resistance or whole numbers are as these have shown to be reliable areas where buyers/sellers will step in.  Notes on chart below.

(click on chart for enlarged view)

With this information I am definitely not looking to go long straight puts or calls or buy volatility as it is highly elevated and history has shown volatility has been a sale.  Also looking at the chart, any move down can see accelerated selling as BWLD would enter into its gap from last earnings.

Although BWLD has shown to consistently perform well with its earnings numbers, I am sightly bearish going into its report on a price action basis.  I believe the conference call will be key as the obvious note is the price of commodities due to recent drought and what kind of pressure this will create on margins.  Also we have seen negative reactions to $CMG (highly publicized) and $MCD earnings.

Looking to go long the 75/70 Aug Put Vertical currently 1.20, risking $120 to make $380 (approx. 1:3 ratio) at Aug expiration but would likely take off before then.

Going into earnings I am looking to go long a Put Vertical Spread.  Yes this is in a sense buying volatility, but Vega is highly reduced.  If expiration were not so far away (25 days) I would prefer the Butterfly spread or Put Ratio Front Spread as I like to play these into earnings with weekly options or expiration week.

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