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Archive for April, 2013

A Possible Earnings Play for This Week

Monday, April 29th, 2013

Last week I suggested that you “purchase May – Apr4 calendar spreads on AAPL at the 410 and 420 strikes, paying $3.85 and $3.75 for them in hopes that AAPL moves higher than its $390 price that it closed at Friday.”  We did just that in a Terry’s Tips portfolio.

 

The stock did manage to move up and we sold these spreads early on Friday for $6.86 and $4.66.  We sold early because we had such a good gain and because Fridays are usually weak for AAPL (people tend to sell Weekly call premium on that day and depress the stock price).  A lower price would have resulted in a lower gain because all of our strikes were higher than the stock price.  The stock managed to move up by $8 after we closed out the spreads, and we would have done considerably better if we had waited (but taking a sure profit is our preference, and we shouldn’t look back – it only hurts).

 

Our gain on the spreads worked out to be 50% after commissions.  We will take that any week.

 

If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!

 

Terry

 

A Possible Earnings Play for This Week

 

Questor Pharmaceuticals (QCOR) is an interesting company which suffered a huge setback in September 2012 when an insurance company which handled 5% of the company’s claims decided that it would no longer cover the expensive drug that represents essentially all of QCOR’s sales.

 

Since that time there have been no other insurance companies to deny coverage, and many institutional investors and hedge funds have purchased stock recently, presumably after surveying other insurance companies to learn if they had any intention to do so.  In contrast to that bullish event, over the past two weeks, short interest has increased by 3.1 million shares to 27 million while the outstanding float is only 54 million.  In other words, shares sold short represent 50% of the float.  Clearly, some people are hoping that other insurance companies will deny coverage and the stock will tank once again.

 

For many reasons, QCOR seems to be a screaming buy.  It has been growing at a good rate, carries a forward P/E of only 5, has no debt, and has multiple consecutive quarters of top line and bottom line analyst beats.  In my opinion, if earnings beat estimates once again, a short squeeze might send the stock considerably higher.

 

The stock has fallen about 22% over the past month, an indication that expectations are not exceptionally high (although it has recovered about 8% in the past week).  I believe there is a strong chance that it will trade higher after the announcement, and plan to make the following trades just before the close on Tuesday (earnings will be announced after the close on that day):

 

Buy To Open 10 QCOR May1-13 27 calls (QCOR130503C27)

Sell To Open 10 QCOR May1-13 32 calls (QCOR130503C32) for a debit of $2.30  (buying a vertical)

 

Buy to Open 10 QCOR Jun-13 30 calls (QCOR130622C30)

Sell to Open 10 QCOR May1-13 30 calls (QCOR130503C30) for a debit of $1.50  (buying a calendar)

 

This is what the risk profile graph looks like if we assume that implied volatility (IV) of the June options falls by 15 (from 65 to 50) after earnings are announced:

 

QCOR Risk Profile Graph

 QCOR Risk Profile Graph

 

These positions will cost about $4500 to place.  If the stock stays flat, a small gain should result.  If it moves higher by any reasonable amount, a larger gain should come our way.  However, if the stock falls more than just a small amount, a loss would result.

 

I feel good enough about this company to take this bullish position for Tuesday’s earnings announcement.

Expectations Trump Results

Monday, April 22nd, 2013

The SanDisk spread I recommended to buy last week generated a 68% gain after commissions in a Terry’s Tips portfolio.  This week I have two other suggestions, one of which you must buy in the next hour or so after this is being sent out.

 

Also, if you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!

 

Terry

 

Expectations Trump Results

 

This week we got lots more support for our premise that expectations are more important than the actual results when a company announces earnings.  Not only did we score big-time with a bearish bet on SanDisk but we saw that expectations were dreadfully low for Google and we bought calendar spreads at strike prices much higher than the pre-earnings stock price and more than doubled our investment on both of them.

 

Last week I wrote a Seeking Alpha article which examined several companies that were announcing earnings this week – 3 Earnings-Related Plays For Next Week.  In this article I identified two companies with unusually low expectations  – AAPL and Caterpillar (CAT) and recommended placing bullish options spreads on them. CAT announced before the open today and they fell short on both earnings and revenue, and reduced future guidance as well (all bad news), but the stock is trading $2.40 higher as I write this.

 

We have purchased May – Apr4 calendar spreads on AAPL at the 410 and 420 strikes, paying $3.85 and $3.75 for them in hopes that AAPL moves higher than its $390 price that it closed at Friday.

 

We also identified a company with excessively high expectations – NetFlix (NFLX).  The stock is up over $12 today in anticipation of the announcement after the close today.  An analyst upgraded them today which contributed to the rise.  With NFLX trading at $175 we are buying May 180 puts and selling Apr-4 175 puts as a diagonal spread.  It should make money if NFLX stays flat or falls by any amount.  This is the trade that you only have a couple of hours to get if you are interested.

 

I have written another article which I believe is very interesting but which hardly anyone has read so far – What Earnings Season Tells Us, So Far.  It points out that 13 of the 15 large companies with Weekly options which have reported so far have exceeded analyst expectations but 9 of them fell in price after the announcement.

Update on SanDisk (SNDK) Earnings-Related Option Play

Thursday, April 18th, 2013

Update on SanDisk (SNDK) Earnings-Related Option Play

 

Last week in a Seeking Alpha article – How To Play The First Week Of The April Earnings Season  I showed how SNDK had excessive expectations going into its earnings announcement (whisper numbers exceeded analyst expectations by 18.7%, the stock had soared over the last week and month, and implied volatility of Weekly options was 50% higher than IV of the May options.

 

With the stock trading at $57.50, I recommended buying May-13 57.5 puts and selling Apr-13 55 puts.  The natural price for this spread at Friday’s close was $1.63.  Shortly after the open on Monday in an actual portfolio conducted at Terry’s Tips, we were able to buy this spread for $1.61 in our Earnings Expectation portfolio.  We bought 15 spreads, shelling out $2452.50 including commissions.

 

The announcement exceeded earnings expectations and revenue grew 14%, but the excessive expectations drove the stock down to about $55 at the open on Thursday.  We closed out our spread shortly after the open, collecting $2.77 per spread, or $4117.50 after commissions.  Our gain for the trade amounted to $1665, or 68%.

 

It was a good week.

How to Use Expectations to Prosper With Earnings Announcements

Monday, April 15th, 2013

This week I will offer a simple spread idea that could make 50% in a couple of days next week.  It will cost about $170 per spread to put on. 

Also, if you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free! 

How to Use Expectations to Prosper With Earnings Announcements 

The earnings season started just last week.  In my last Idea of the Week I recommended buying a straddle on JPMorgan (JPM), the first big company to announce this time around.  We made that trade in an actual portfolio for Terry’s Tips subscribers and closed it out for a 15%+ gain after commissions. 

I also suggested an options strategy for JPM in a Seeking Alpha article – How To Play The JPMorgan Earnings Announcement.  In another Terry’s Tips portfolio  we placed calendar spreads as outlined in this article and closed them out for a gain of 15% after commissions even though the stock fell a little after the announcement while we were betting that it would go higher. 

A wonderful thing about options is that you can be wrong and still make profits as we did last week in our JPM trades.  Terry’s Tips subscribers who followed both portfolios made over 30% last week, more than most people make in an entire year of stock market investing. 

This week I wrote another Seeking Alpha article which checks out seven big companies which announce this week – How To Play The First Week Of The April Earnings Season.  

The major message of this article is that the price of the stock after the announcement is more dependent on pre-announcement market expectations than the actual numbers that the company releases.  If expectations are too high, the stock will fall no matter how much the company beats the analysts’ projections. 

Of the seven companies reviewed, SanDisk (SNDK) seemed to have the highest level of expectations.  Whisper numbers were 18.6% higher than analyst projections, the stock had shot up over 10% to a new high over the last week, and had moved 5% higher in the last week alone.  We believe that it is highly likely that some investors will “sell on the news” no matter how good it is, and the stock will either stay flat or fall after the announcement. 

With the stock trading about $57.70, I am buying May 57.5 puts and selling April 55 puts. Implied volatility (IV) of the May options is 37 while the April options carry an IV of 70, nearly double the May number (this means you are buying “cheap” and selling “expensive” options).  Each diagonal spread would cost $163 to place at the natural option prices at the close on Friday. 

Here is the risk profile graph for these spreads if you bought 20 of them, investing about $3400 after commissions (of course, you could buy fewer, or more, if you wished): 

SNDK Risk Profile Graph

SNDK Risk Profile Graph

This graph assumes that after the announcement, implied volatility (IV) of the May options will fall from its current 37 to 30 which is more likely in a non-announcement time period.  The graph shows that when you close the positions on Friday, April 19th, a double-digit gain could be made if the stock holds steady, and could nearly double your investment if it fell about $2 ½ after the announcement.  A profit would result no matter how far the stock might fall in value. 

We think the stock is likely to fall after the announcement because expectations are so unusually high.  If it moves higher, however, a loss could very well result.  Even in the world of options, there is no free lunch.  You need to take a risk.  We like our chances here.

An Interesting Straddle Purchase Opportunity in J.P. Morgan (JPM)

Monday, April 1st, 2013

Most of the time I prefer to sell options with just a few days or weeks of remaining life and collect the premium that is decaying at a higher rate than ever before.  However, this policy is not always the most profitable alternative out there.  Today I would like to discuss one of those situations where buying options rather than selling them might be the better bet. 

If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free! 

An Interesting Straddle Purchase Opportunity in J.P. Morgan (JPM)

 Implied Volatility (IV) of an option price is supposed to measure the market’s expectation of how much the underlying security will fluctuate in one year.  If an options series has an IV of 20, the market expects the stock will move either up or down by 20% over the course of a year. 

Sometimes there is a huge difference between IV of the options and the actual price behavior of the stock.  For example, check out J P Morgan (JPM).  The April options have an IV of 24 with three weeks of remaining life, and this IV is unusually high because an earnings announcement is due on April 12 (before the open), and volatility is usually higher than normal after announcements. 

So how much did JPM fluctuate over the past year?  On June 4, 2013 it hit a low of $30.83 and on March 15, 2013 it hit a high of $51.00. This is a 64% change, more than triple the IV of the options.  In other words, options are relatively inexpensive compared to the actual volatility of the stock. 

When you see a situation like this, the best options play might be to buy a straddle (both a put and a call) at an at-the-money strike and hope that the stock fluctuates as it has in the past. 

Right now, with JPM trading at $47.50, you could either buy an April 47 or 48 straddle for about $2.00 (if you think JPM is headed higher, you would select the 47 strike, and if you think JPM is more likely to fall, you would choose the 48 strike).  If the stock fluctuates more than $3.00 in the next three weeks, you could sell your straddle for a 50% gain.  (The nice thing about straddles is that you don’t care whether the stock goes up or down, just as long as it moves.) 

So how likely is JPM to fluctuate by at least $3.00 in a month?  Here are the biggest and smallest moves it has made over the past 25 months: 

Month

Open

High

Low

Close

Big Up

Big Down

3/1/2013

48.6

51

47.28

47.46

2.08

1.64

2/1/2013

47.4

49.68

46.85

48.92

2.63

0.20

1/2/2013

44.98

47.35

44.2

47.05

3.38

-0.23

12/3/2012

41.27

44.54

40.2

43.97

3.46

0.88

11/1/2012

41.7

43.07

38.83

41.08

1.39

2.85

10/1/2012

40.88

43.54

40.42

41.68

3.06

0.06

9/4/2012

36.98

42.09

36.78

40.48

4.95

0.36

8/1/2012

36.19

38.86

34.76

37.14

2.86

1.24

7/2/2012

36.27

37.2

33.1

36

1.47

2.63

6/1/2012

32.41

37.03

30.83

35.73

3.88

2.32

5/1/2012

43

44.24

32.26

33.15

1.26

10.72

4/2/2012

45.75

46.35

41.8

42.98

0.37

4.18

3/1/2012

39.51

46.49

39.12

45.98

7.25

0.12

2/1/2012

37.89

39.94

37.05

39.24

2.64

0.25

1/3/2012

34.06

38.1

34.01

37.3

4.85

0.05

12/1/2011

30.86

34.19

30.03

33.25

3.22

0.94

11/1/2011

32.47

35.18

28.28

30.97

0.42

6.48

10/3/2011

30.03

37.54

27.85

34.76

7.42

2.27

9/1/2011

37.62

37.82

28.53

30.12

0.26

9.03

8/1/2011

41.16

41.37

32.31

37.56

0.92

8.14

7/1/2011

40.81

42.55

38.93

40.45

1.61

2.01

6/1/2011

42.87

42.99

39.24

40.94

0.12

4.00

5/2/2011

45.94

46.07

41.69

43.24

0.44

3.94

4/1/2011

46.55

47.8

43.53

45.63

1.70

2.57

3/1/2011

46.47

47.1

43.4

46.1

0.41

3.29

 I have highlighted the months in which the stock fluctuated at least $3.00 in either direction (enough for you to make a 50% gain on a $2.00 straddle purchase).  For those months, a 50% gain would be possible in 17 out of 25 months (68% of the time).

 Admittedly, in this example with April options, there are only three weeks rather than four for the stock to fluctuate by this much, but since this time period includes an earnings announcement, greater volatility can be expected in this three-week period than a normal (no earnings announcement) month. 

If you were to buy an April straddle on JPM for $2.00 and place a good-til-cancelled order to sell it if it hit $3.00, you would gain 50% on your investment (less commissions).  If it did not execute in the next two weeks, I would recommend selling it when there was one week remaining for the April options.  If the stock is trading exactly at the strike price of your straddle, you would probably get back half of your $2.00 cost, losing 50%.  If the stock is at any other price than exactly at your strike price, you should be able to sell the straddle for more than $1.00.  If the stock is as little as $1.00 higher or lower than your strike price, you should be able to get back $1.50 of your original $2.00 cost by exiting (selling) the position with a week of life remaining in the option.  If the stock is $2.00 away from the strike price, you should be able to sell the straddle at a profit. 

The stock does not have to fluctuate by $3.00 for you to sell an at-the-money straddle for $3.00 since there will always be some time value to the options (over and above the intrinsic value) right up until the options expire. 

I like the odds of this straddle purchase and plan to do it both in my personal account and in one of my portfolios that I conduct at Terry’s Tips

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