Last week, I published an article about calendar spreads using Intuitive Surgical (ISRG) as an illustration. It was also my personal recommendation to employ this spread strategy and to take advantage of difference in Implied Volatilities. The link to the previous article is below.
As a reminder, I
sold the ISRG October 530 Calls and bought the November 530 Calls. The net debit per spread contract was $4.20 with the October Call IV at 42.5% and November Call IV at 31.6%. My concern with the trade was the October 16 earnings release along with other stock-moving news that may be announced that day.
My purpose for this article is to provide a quick update for those that may have used a calendar spread on ISRG last week. With that background, you may be asking, "what is happening with ISRG?" Why is ISRG down to 490 (a 4% decline) on October 9? Other than the obvious explanations - it is October, earnings season has begun and the market has been correcting from recent highs - the most compelling reason for the drop is Edwards LifeSciences (EW) and last week's correction in Nuvasive (NUVA).
EW is another medical equipment supplier that just cut its earnings outlook for the third quarter and the stock is down over 21% today, October 9... ouch!! ISRG is operating in the same business sector as this health care equipment provider and is moving in sympathy with EW. EW has been a highly recommended stock by the Street, and like ISRG, one of the top performing stocks in the past decade.
Last week, after the close on October 3, NUVA, another hospital/surgical supplier, but on a far smaller scale to ISRG, announced a disappointing earnings forecast for the third quarter. The analyst downgrades followed on October 4, along with other negative news, driving NUVA stock down over 33% that day.
Let's consider this ... if you are an investor that is Long ISRG, you may be asking whether the earnings release news from ISRG in relation to expectations will be similar to the earnings forecasted by EW and NUVA. If so, these investors will reduce their position, buy some protection and/or take the money and run prior to October 16. At this point, the reversal in NUVA, compounded by EW's recent action, may very likely be the catalyst for the correction (sell off) in ISRG stock and the sub-sector in general.
The IV's on ISRG have increased even further since last week. As usual, there are so many moving parts to any trade, to include an earnings surprise. You never know what could be the 'wrench in the works' for any trade, so stay alert.
Additional disclosure: I have a Call Calendar Spread on ISRG.