Trading Intuitive Surgical's Earnings Call On January 19

| About: Intuitive Surgical, (ISRG)

Last quarter, I wrote an article here on Seeking Alpha about trading Intuitive Surgical's (NASDAQ:ISRG) earnings release. That trade was a major homerun and worked to perfection.

For this upcoming quarter, I have a different view on how to trade this release. For those not familiar with Intuitive Surgical, it is a major price mover after reporting earnings.

Intuitive Surgical designs, manufactures, and markets da Vinci surgical systems for various surgical procedures, including urologic, gynecologic, cardiothoracic, general, and head and neck surgeries.

Currently, Intuitive Surgical is trading at $456.95. The 52-week range is $277.50 - $474.50.

52wk high: 474.50
52wk low: 272.0301
EPS: 11.57
PE: 39.80
Div Rate: N/A
Yield: N/A
Market Cap: 17.82 B
Volume: 319.11 k
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Intuitive Surgical is scheduled to report earnings after the market closes on January 19, 2011. The stock has been on a roll lately and I am a bit concerned that it is nearing a top at its current price. However, there is still positive news coming out with Intuitive Surgical. Last week, Collins Stewart reiterated a "buy" rating on the stock following the FDA's recent approval of a vessel sealer product for its EndoWrist instrument line.

I am always cautious with earnings trades on the call side when a stock is near its 52-week high. This is an issue with this trade. I want to minimize risk by using a trade that can still have a very large profit.

Here is a closer look at how Intuitive surgical has trades right before releasing earnings and how the stock traded immediately after:

On October 18, 2011, Intuitive Surgical reported third-quarter earnings. The stock saw the following price movement:

Date Open High Low Close Volume
Oct 20, 2011 422.11 422.50 413.00 418.41 442,784
Oct 19, 2011 419.70 419.70 419.70 419.70 1,442,500
Oct 18, 2011 389.78 391.94 380.00 382.76 691,365
Oct 17, 2011 391.74 391.74 391.74 391.74 310,200
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From a low of $380.00/share on the day before reporting earnings to a high of $422.50/share on the day after the release, this represented a 11.1% price increase.

On July 19, 2011, Intuitive Surgical reported second-quarter earnings. The stock saw the following price movement:

Date Open High Low Close Volume
Jul 21, 2011 397.90 415.19 397.90 413.74 899,814
Jul 20, 2011 397.88 397.88 397.88 397.88 1,325,800
Jul 19, 2011 365.91 375.99 365.05 374.90 677,571
Jul 18, 2011 357.23 362.99 353.39 362.28 268,884
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From a low of $353.39/share on the day before reporting earnings to a high of $415.19/share two days after the release, this represented a whopping 17.4% price increase.

Currently, the stock is much higher right now than it was preceding their past two earnings releases. Using the January 20th expiration is too risky here, as there will be no time value left at all.

Intuitive Surgical has a wide 52-week range. The upside is probably $520.00/share by February 2012, and this is if the company reports blowout earnings once again. Should they miss estimates and guidance, this stock could really tumble.

The way I am going to use trade this earnings release is by using a 'strangle' option strategy.

Long Strangle Construction

  • Buy 1 OTM Call
  • Buy 1 OTM Put

I will be purchasing February 2012 $500.00 call option strike prices and February 2012 $405.00 strike put options. I am more inclined to play a bearish side. The goal here is not to necessarily hit these strike prices (all the better if it does), but to make a large enough of a price move to see one side of the trade (calls or puts) sell for a higher premium than what was paid to place the trade initially. Last quarter, this approach worked great.

Currently, the bid/ask spread for this trade is $9.70 - 10.90. Please be sure to use a limit order and wait for it to get filled. Never use a market order on thinly traded options.

Good luck.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ISRG over the next 72 hours. I will be placing my order by this Friday