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TiVo Inc. (NASDAQ: TIVO) is not your typical trade, according to option trading information. For starters, the contracts are generally too volatile and too expensive. Over the past two weeks, the stock has literally been cut in half. The reason is the court victory in its patent case against Dish Network Corporation (NASDAQ: DISH) and EchoStar Corporation (NASDAQ: SATS), a significant win for TiVo, is being allowed to be heard in federal appeals court.
About a week ago, TIVO options were simply too expensive to use for speculation, and were even too expensive to use for hedging transactions. But with the CBOE Volatility Index (VIX) off its highs, and with May options expiration taking out the shorter-dated contracts, we should take a look.
TiVo is scheduled to report earnings Tuesday after the close. Thomson Reuters estimates a 16-cent loss for EPS and $42.84 million in revenues. The important thing to keep in mind here is that unless TiVo’s numbers are far from estimates, this event is more about what will be said on the conference call than actual earnings. After all, $300 million, or perhaps far more, hangs in the balance.
Since TiVo has already fallen, with the market giving further punishment over the last week, the speculative trade is the reversal trade. I suggest going long TIVO calls on a speculative, deleveraged basis. In this manner, a lower premium is better for leverage right now.
The TIVO June 10 Calls (TIVO 100619C00010000) cost 45 cents, but it’s “only” 25 cents for the TIVO June 11 Calls (TIVO 100619C00011000). Considering the stock’s drop from north of $18 to $9, taking the higher speculative strike for about 60% of the price paid is the cheaper bet with similar or slightly lower percentage risks, and what looks to be a slightly higher percentage gain.
If the news and guidance on the court case is bad, you have probably a dime worth of downside on the $11 call versus exponential upside. The $10 call could easily have 20 cents of downside. While the percentages of risk are the same, the idea is to get the lowest raw premium that still has a remote chance of getting close to the strike price.
After all hell broke loose on May 14, the stock did bounce up to over $11 on the following trading day before the poor market and added selling took shares south.
We only have the short interest data as of April 30 settlement dates, so it is probably very unrepresentative. Short interest was listed at 2.78 million shares at the time. It is likely much higher now, and it is worth noting that the short interest was more than 14 million shares as recently as March.
Shares are at $9.15 this morning, and the stock has dipped slightly under the $9 handle in each of the last three trading sessions.
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