Last week I gave you an option play on Tesla Motors (TSLA) to be placed just before they announced earnings. Since there were no weekly options available, the March series was sold. By the end of the week, a small gain had been made in the portfolio but the real gains will not come until the March options expire on the 16th.
Today I would like to tell you about two other pre-earnings-announcement (PEA) plays that Terry’s Tips subscribers carried out last week.
More Pre-Earnings-Announcement Plays
Herbalife (HLF) PEA Play: In the Terry’s Trades portfolio when HLF was trading about $40 we bought 6 Jun-13 – Feb4-13 call calendar spreads at the 39 strike, paying $2.25 per spread. We paid the same for 6 more calendars at the 41 strike. In retrospect, these strikes were too close to the stock price and did not offer a wide break-even range. Since most big moves are to the downside, a better strike would have been 38 or even 37 instead of the 39.
Our total investment was $2700. After the announcement the stock fell 7.5% to $37, putting it outside the range of our strike prices. We bought back the Feb4-13 41 calls for $.05, paying no commission, and sold the Jun-13 41 calls for $2.25, losing a total of $30 on the spread before commissions. On Friday we sold the 39 calendar spread for $2.80, gaining $55 x 6 = $330, or a net of $300 for the two spreads. Commissions amounted to $52.50, so our net gain was $247.50, or 9.2% on our investment.
We felt that this was not a bad gain considering that we didn’t make the ideal choices of strike prices and the stock fell by a relatively large amount. If we had bought the 38 strike rather than the 39 strike, our gain would have been $150 greater, or almost 15% total for the week.
Abercrombie & Fitch (ANF) PEA Play: In the Earnings Eagle portfolio, on Thursday, the day before the pre-market announcement on Friday, with ANF trading about $49 we bought 15 Apr-13 – Feb4-13 call calendar spreads at the 48 strike, paying $1.28 per spread. We paid $1.30 for 15 more calendars (using puts) at the 44 strike and $1.35 for 15 diagonals, buying calls at the 52.5 strike (the 53 strike was not available in April) and selling Feb4-13 calls at the 53 strike.
Our total investment was $5859. After the announcement the stock fell over 7% to $45.50, but remaining within the range of our strike prices. We bought back the Feb4-13 53 calls for $.03 and the Feb4-13 44 puts for $.05, paying no commission, and sold Apr-13 44 puts and 52.5 calls as a straddle, collecting $2.55, losing a total of $270 on the two spreads before commissions. We sold the 48 call calendar spread for $1.97, gaining $69 x 15 = $1035, or a net of $765 for the three spreads. Commissions amounted to $187.50, so our net gain was $577.50, or 9.8% on our investment.
We have developed a set of Trading Rules for PEA Plays for Terry’s Tips paying subscribers. They might be worth many times what a subscription would cost.
Tags: ANF, Calendar Spreads, diagonal spreads, Earnings Announcement, Earnings Option Strategy, Earnings Play, HLF, implied volatility, PEA, Portfolio, Pre-Earnings-Announcement, Profit, profits, Terry's Tips, thinkorswim, TSLA, VIX, Volatility, Weekly Options