It’s election day, and of course, the name Ross Perot comes to mind. Not really. But his former company, Electronic Data Systems, happens to be a predecessor company of today’s Trending Stock, DXC.

The company DXC was formed in 2017 when Hewlett-Packard Enterprise sold its enterprise services business, which was the old EDS company, to Computer Sciences Corp. The merged company was renamed DXC.

What piques our interest is the fact that the stock has gone pancake flat for the 2nd time since the merger, trading in a narrow range between 20 and 21 for over a month.

You can see in this time series chart that the 1-month implied volatility expectations (the lower green line) are high as investors anticipate the earnings report scheduled for this Thursday. The high volatility expectations tell us that DXC options are relatively expensive. 

This Volatility Term Structure  chart for DXC shows us the implied volatility for the at-the-money options for each expiration. The term structure is steeply inverted as investors brace for a week of big events that could impact DXC share prices. This week’s events that could be the catalysts for a breakout move include the election today, and DXC will report earnings on the same day that the Fed Chair will be holding his press conference after the FOMC decides and announces their interest rate policy. With these potential catalysts that everyone knows about, this graph tells us that the shortest-dated options are more expensive than longer-dated options.

This Volatility Skew  chart shows the implied volatility of the options at each strike price for the December 20th expiration. This skew may be choppy, but one thing is clear: at-the-money strike prices have less expensive options in relative terms to the out-of-the money options on both the lower and the upper strike prices. This skew tells us that we can buy at-the-money options and sell the out-of-the-money wings to gain a probability advantage. 

DXC share prices are compressed. DXC has a history of making big moves after a compression signal. A compression signal tells us to expect a breakout move within the next few weeks. The problem is that options prices are telling us that other investors are also expecting a breakout move. The options prices are clearly anticipating a big move in the near future. 

We want to position ourselves to profit from a potential breakout move, so we will buy at-the-money options. To offset the higher costs of the at-the-money options, we will sell even more expensive out-of-the-money options – known as selling the wings – to reduce our costs and improve our probability of success

To get the specific details and prices on today’s trade ideas, be sure to read today’s ODDS Online Daily Option Trade Idea.  

To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.

Thank you,

Don Fishback