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.
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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
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.
Tags: AAPL, Auto-Trade, Calendar Spreads, Calls, diagonal spreads, Earnings Announcement, Earnings Option Strategy, Earnings Play, implied volatility, Portfolio, Profit, profits, Puts, QCOR, Questor, Terry's Tips, thinkorswim, Volatility