The major issue with Garmin is its PND business is saturated. The average price of PNDs are on a decline for 3 years. And in the last year or so, the threat from smart phones providing free satellite navigation has become real.
There is a plethora of negative commentary by analysts all pointing to these facts. On the other hand, however, Garmin trades at 12x earnings and 3x cash flow. Plus, it has almost 10% short interest. The question you have to beg is how much the bad information is already discounted in the stock price. The last three times Garmin reported earnings, the stock made an average of 13% move. This time, at the time money straddle is going for $3.70, implying about 11% move. However, take a look at the technicals in the daily chart. There is converging triangle in play and the stock only needs to make about 7% move in either direction to break outside of the triangle. And you know when stocks breakout from a triangle, they tend to keep moving as it implies a change in trend.
That makes me think the straddle is actually underestimating the potential move despite 51 implied volatility in March. Going into the earnings, I think the right trade is to buy $34 straddle and sell $4 or $5 out of money strangle to lower the cost. This could also be placed as two verticals as given the P&L chart. Specifically,
- Buy to open March $34 calls- Buy to open March $34 puts
- Sell to open March $39 calls
- Sell to open March $29 puts
In TOS, the spread has to be entered in two separate orders as I have broken down in the attached P&L chart. This is a $5 spread on both directions, which is currently going for $3. So the stock will have to move in either direction by at least $3 before break even by March expiration. I like the odds.
For those willing to take a bit higher risk, just buy the straddle without selling out-of-money strangle. This will cost you a bit higher price, but you have unlimited profit profile in either direction.
Good luck!
