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Archive for July, 2013

How To Play The Seagate Technology Earnings Announcement This Week

Sunday, July 21st, 2013

The Google (GOOG) spreads I recommended last week resulted in average gains of 58% (after commissions) in Terry’s Tips actual portfolios.  Not a bad day.  The stock fell after the announcement just as we had guessed.

Read to the bottom of this letter to learn how you can become a Terry’s Tips Insider for absolutely no cost.

Terry

How To Play The Seagate Technology Earnings Announcement This Week

I have written a Seeking Alpha article explaining how I would play Seagate Technology (STX) this week:  How To Play The Seagate Technology Earnings Announcement This Week

There are many similarities between the situation in GOOG and Seagate.  I expect the stock to fall after the announcement, and have recommended to buy Aug-13 48 calls and sell Jul4-13 47.5 calls (a diagonal spread) which does best if the stock remains flat or falls.

Please read the entire Seeking Alpha article to get my full thoughts on the diagonal spread play and why I expect the stock will trade lower after the announcement.

A similar situation exists in Starbucks (SBUX) and I have recommended a less risky trade in that company – buying Aug-13 72.5 calls and selling Jul4-13 calls at a credit.  This spread will make money no matter how low SBUX might fall and only starts losing money if the stock moves about $2 higher.

Good luck if you do something this week in Seagate or Starbucks!

How to Play the Google Earnings Announcement This Week

Monday, July 15th, 2013

This week the earnings season starts in earnest. One of the most interesting companies reporting is Google, mostly because expectations seem to be sky-high and our Expectations Model predicts that there is a good chance the stock will fall after the announcement is made Wednesday after the market closes.

Read to the bottom of this letter to learn how you can become a Terry’s Tips Insider for absolutely no cost.

Terry

How to Play the Google Earnings Announcement This Week

I have written a Seeking Alpha article explaining how I would play Google this week:

How To Play The Google Earnings Announcement …

In the article I suggest buying a diagonal call spread with the long side in August at the 925 strike and the short side in the Jul-13 series at the 920 strike. I placed this spread in my own account today for a debit of $3.60 (in addition to the $500 maintenance requirement per spread, the total cost is about $860 per spread).

This spread should make a gain if the stock goes up by less than $30 (my article explains why I don’t think it will go up at all) or if it falls by less than about $50 (I think this is a possibility but a remote one).

Another possible spread would be to use the same strikes but buy Jul4-13 weeklies instead of the August series. You could do this for a credit of about $.90 which would lower you total investment to about $420 per spread after commissions (the $500 maintenance requirement less the amount of the credit). This spread would make a gain no matter how far the stock might fall (even if it fell to zero) but would start losing money once it rose by about $20 (again, an unlikely event in my opinion).

Another interesting spread would be to pick the strike price (or maybe more than one) where you think the stock might end up on Friday, and buy a Jul4-13 – Jul-13 calendar spread at that strike. It should cost you only about $200 per spread. You can’t lose more than that amount on the trade, and if the stock does end up very near the strike you picked, the spread might be worth $1000 or so. The entire $200 should not really be at risk because your Jul4-13 call should always be worth more than the Jul-13 call, although if the stock ends up at a big distance away from the strike you picked, it might be difficult to get the entire $200 back.

Please read the entire Seeking Alpha article to get my full thoughts on the diagonal spread play and why I expect the stock will trade lower after the announcement.

Good luck if you do something this week in Google!

How to Play the JP Morgan and Wells Fargo Announcements Friday

Tuesday, July 9th, 2013

While we were right on the direction that Accenture (ACN) would take after the earnings announcement (down), we missed how far it would drop (it fell 15% even though it beat earnings estimates). Our diagonal credit spread using calls would have made gains no matter how far it fell but we added a higher-strike calendar “just in case we were wrong about the direction.” That spread lost big-time, and has encouraged us to stick with our model and stop second-guessing ourselves.

Today I wrote a Seeking Alpha article discussing the only two companies with weekly options who announce this week – How to Play the JP Morgan and Wells Fargo Announcements Friday

In today’s report I will have a more thorough discussion of the option strategies I suggested in that article.

Terry

How to Play the JP Morgan and Wells Fargo Announcements Friday

The major point of the Seeking Alpha article was that both companies share similar historic patterns – they consistently beat estimates and the stock either changes very little or falls once earnings are announced. This time around, expectations are quite high for both companies (whisper numbers exceed estimates, and the stock has gone up about 20% since the last earnings announcement and hit new highs this week).

In short, both stocks are in for a likely drop in price after the announcement because some part is likely to disappoint (if not earnings, then maybe revenue, margins, or guidance). We have learned from experience that high expectations consistently result in lower post-announcement prices.

We are buying diagonal call credit spreads in both companies. These spreads will make gains if the stock trades lower by any amount, and will lose if the stock moves higher by a dollar or so (but we doubt that it will move in that direction).

We suggest waiting until late in the day on Thursday to make the trades because the stock often rises in expectation of a good announcement just prior to its being made (and these diagonal spreads should go for a larger credit).

With JP Morgan (JPM) trading at about $54.50, we would buy Jul-13 55 calls and sell Jul2-13 54.5 weekly calls which expire on Friday. Here is the risk profile graph for 10 spreads which could be sold for a $.02 credit right now (but this credit should be higher on Thursday if the stock is higher then):

JPM Risk Profile Graph

JPM Risk Profile Graph

If you were to buy 10 spreads, there would be a $500 maintenance requirement (less any credit you were able to get), and that would be your maximum possible loss (which would come about if the stock moved significantly higher). It can go up about $.50 before a loss should result (assuming that IV of the July options falls from 24 to 20 after the announcement). If there is a small downturn in the stock (our belief as to the most likely outcome), the spread could return as much as 50% before commissions. It is a small bet with limited possible gains (or losses).For Wells Fargo (WFC), we are buying Jul-13 43 calls and selling Jul2-13 43.5 weekly calls expiring on Friday. At the present time, this spread could be sold for a credit of $.10, although if the stock price moves higher by Thursday it should be able to be sold for more. Here is the risk profile graph:

WFC Risk Profile Graph

WFC Risk Profile Graph

If you buy 10 diagonal spreads, there would be a $500 maintenance requirement (reduced by the $100 you collect from the credit) for a net cost of $400 (which is also your maximum loss which would come about if the stock moves significantly higher).  If the stock stays flat, you would keep the $100 credit plus the remaining value of the Jul-13 43 call.  This is not a huge investment (or return) although it looks like there is a pretty good chance of a 25% gain less commissions for the day (this graph assumes that IV of the July options will fall by 5 after the announcement – it might not fall that much and the gain would be greater if the stock is flat).

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