Daily Stock Market Equity and Options Trading Commentary

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Monday, October 26, 2009

Earnings Season Option Plays for Tuesday & Wednesday

In my latest two blog posts Monday and Wednesday, I listed some stocks which I would be willing to go long by selling the puts right before the stock reported earnings. Keep in mind these are companies which I believed would have a positive reaction to the earnings, however if the stock moved sideways on the number this strategy would still likely return a gain the following day. This is because I am taking advantage of the increased levels of implied volatility factored into the option premium before earnings. If you missed them, be sure to check out Monday's blog post here, and Wednesday's here. So far this earnings season the overall results have been very positive, even on Ebay (EBAY), which sold off nearly 10% after earnings; I was able to purchase back the puts options (closed the position) for a $4 per contract gain the following day. The best results are of course when has a very positive reaction to the report and pops. My best trades so far this earnings season include the trades indicated in the two previous blog posts on the following companies:
  • Google (GOOG)
  • Apple (AAPL)
  • Caterpillar (CAT)
  • Texas Instruments (TXN)
  • SanDisk (SNDK)
  • Walter Energy (WLT)
  • Yahoo! (YHOO)
  • Amazon (AMZN) By far the best with over a 1900% gain the following day
  • Microsoft (MSFT)
The put options sold on the stocks above were quickly closed within 2 hours after market open following the earnings report (some for as low as $1 per option contract). In most of the cases, the call options purchased were also sold the following day, but I continue to hold both the Google and Apple call options. In this post, I will lay out some trades for Tuesday and Wednesday (October: 27 and 28).

To reiterate my previous blog post:

In this post, I will outline an option strategy that I use particularly during earnings season. This will put money in my pocket up front, give me a chance to purchase the stock for less than it's trading for now, and also give me gains if the stock moves even higher. I must note that this strategy could lose money if the stock moves much lower after results and you get the stock PUT to you at expiration (or in the rare case of an early exercise). This post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows some of the stocks I'm willing to go long (for reasons not discussed in this post), which will be reporting earnings in the two days mentioned above. To understand the table below read the example used with Visa (V).

With Visa reporting after the bell Tuesday, it may be a great day to sell put options as implied volatility will likely soar before the earnings release.

For example, let's say I'm willing to purchase Visa's stock at 7% less than its current share price. I would look to sell the November 70 strike Put options, and with the money received would look to purchase November 80 strike call options. Opening this position would put $40 in my portfolio. If Visa expires between 70 and 80 a share at November expiration, this position would return $40 (*NOTE* I always close my positions ASAP and do not wait for expiration). However, if Visa can get and close above 80 at November options expiration, this position has the potential to return even more. The break-even for this position is Visa at 69.60 a share at expiration; anything less would result in an unrealized loss on 100 shares of Visa stock. I would also look to purchase call options on the December 85 (instead of the November 80), as they have more time value and do not have the same high levels of the implied volatility factored into the option premiums.

Company Ticker Put Call Net

AK Steel Holding Corp. AKS 17 22 $15
BP BP 50 60 $15
Buffalo Wild Wings BWLD 35 50 $40
Norfolk Southern NSC 45 50 $60
Patriot Coal PCX 11 14 $40
Sociedad Quimica y Minera SQM 35 45 $30
Textron Inc. TXT 17 22 $15
Under Armour, Inc. UA 30 35 $70
United States Steel Corp. X 38 44 $40
Visa Inc. V 70 80 $40

ConocoPhillips COP 49 55 $26
Express Scripts, Inc. ESRX 75 90 $60
First Solar, Inc. FSLR 140 170 $160
Southern Copper Corp. ... PCU 35 40 $115

This is a bullish strategy and should not be considered if you think the stock will sell off after earnings. However if you feel you've missed the stock and think it could move sideways or up after the report, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

The list above are stocks which I wouldn't mind holding in my portfolio if they get PUT to me at expiration. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

I use this strategy to open long positions when the market has rallied as much as it has. This strategy will allow me to purchase stocks for less, as well as provide a return without the stock if the market continues to rally. The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long AAPL December 200 Call Options, AAPL LEAP 100 Call Options, GOOG LEAP 300 Call Options, V November 60 Call Options, Short AAPL November 220 Call Options

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Anonymous said...

Most of the values have changed. There is no positive credit. Does this change your theme of this post.

Option Maestro said...

Simply adjust the strike prices to something similar. Which stock are you talking about in particular?

Anonymous said...

Visa put nov 70 .85
call 80 1.40 cost to enter: .55

Option Maestro said...

I would look at selling the 72.50 or waiting for weakness in stock if we get some by tomorrow.

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