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Posts Tagged ‘Buffalo Wild Wings’

Options Strategy for the Tesla Motors Earnings Announcement

Tuesday, February 19th, 2013

Last week I gave you an option play on Buffalo Wild Wings (BWLD) that ended up making a 63% gain.  This week I am offering another pre-earnings announcement, this time on Tesla Motors (TSLA).  If you want to try this strategy you will have to hurry because the announcement is due after the close on Wednesday, February 20. 

Options Strategy for the Tesla Motors Earnings Announcement 

In case you want to know the details of my thoughts on this company which makes electric cars, check out my Seeking Alpha article – How to Play the Tesla Motors Earnings Announcement.  

In a nutshell, I think the likelihood of the stock going up after the announcement is very low.  To my way of thinking, it is hopelessly overvalued and even the best of news shouldn’t push it much higher (it has already soared about 50% since August on no more than hope that their new Model S will be a big hit). 

On the other hand, there are a large number of issues (including earnings) that might very well depress the stock.  Here is what I would do: 

With the stock trading around $37, buy TSLA June 39 calls and sell March 37 calls.  This diagonal spread will cost about $1.05 ($105) to place (the natural price is $1.15 but a lower execution should be possible).  There will be a $200 maintenance requirement per spread.  If TSLA ends up at any price below $37 when the March options expire on the 15th, they will be worthless and I will end up owning June 39 calls which surely should be worth more than $1.05 (currently $3.00 – $3.40).  I hope to exit the positions shortly after the announcement is made. 

I also plan to buy half as many June-13 – March-13 33 put calendar spreads (cost about $1.90) to protect me against a possible 10% drop in the stock after the announcement.  If you bought 10 of the above diagonals and 5 of these calendar spreads, your total outlay would be about $4000 (mostly the non-cash $2000 maintenance requirement on the 10 diagonal spreads). 

One disadvantage with these spreads is that it might be necessary to wait as long as 3 ½ weeks to get the maximum possible return, but I expect an earlier exit will be possible at a slightly less than the maximum gain.  I am aiming for a 25% gain on these spreads. 

We will be placing these spreads in one of our Terry’s Tips portfolios on Tuesday or Wednesday.

Closing Out the Buffalo Wild Wings (BWLD) Spreads

Wednesday, February 13th, 2013

Closing Out the Buffalo Wild Wings (BWLD) Spreads

If you recall, on Monday I recommended buying the following two spreads while BWLD was trading about $77 in advance of Tuesday’s earnings announcement after the close:

BTO (buy to open) 6 BWLD Jun-13 85 calls (BWLD130622C85)
STO (sell to open) 6 BWLD Feb-13 80 calls (BWLD130216C80) for a debit of $1.40  (buying a diagonal)

BTO (buy to open) 4 BWLD Jun-13 70 puts (BWLD130622P70)
STO (sell to open) 4 BWLD Feb-13 75 puts (BWLD130216P75) for a debit of $.90  (buying a diagonal)

In my personal account, after sending out this recommendation, just to make sure these prices were still available, I bought the above spreads.  I paid $1.39 for the call spread and $1.35 for the put spread.

These two spreads cost $1374 plus $25 in commissions for a total cost of $1399.  There was a $3000 maintenance requirement charged by the broker, although I figured that the actual amount at risk was no more than half that amount because the long puts and calls both had five months of remaining life and would have value (the broker assumes that you don’t sell them as soon as you can and just let them expire worthless). 

So to my way of thinking, I risked about $2900 on these spreads although I had to leave an additional $1500 in my account alone for what worked out to be a single day.

On Wednesday after the announcement the stock had hardly changed from what it was at the open on Monday, $77, although it had move about $4 higher late Tuesday and opened about $4 lower on Wednesday.

At about 10:30 a.m. I sold the call spread for $2.51 and the put spread for $2.42, collecting $3274 less $25 commissions, or $3249.  That gave me a cash profit of $1850 on my adjusted $2900 at risk.  That works out to a 63% gain for the trades.

I would have made just about the same gain if the stock ended up at any price between $75 and $80.  If I had waited until Friday to close out the spreads, I would have made more if it fell in that range, but I will take a 63% profit for a couple of days any time.

This is the third similar trade I have made with pre-earnings announcement companies in the last three weeks, and all three trades have had similar profitable results.

Options Strategy for the Buffalo Wild Wings Earnings Announcement

Monday, February 11th, 2013

 

Last week I wrote an article explaining why I thought that Green Mountain Coffee Roasters (GMCR) would move higher after its earnings announcement.  I was totally wrong.  The stock fell by nearly $5. 

In one of my Terry’s Tips portfolios, I placed a diagonal spread which would do best if GMCR moved higher (as I expected it would at the time).  In spite of its moving lower, I closed out the spread the day after earnings for a 30% gain after commissions.  Not a bad return when you are totally wrong. 

Today I would like to propose a similar diagonal spread to be used on another company which will announce earnings next week (on Wednesday, after the close).

Options Strategy for the Buffalo Wild Wings Earnings Announcement 

 

I really don’t know much about Buffalo Wild Wings (BWLD).  I have never visited one of their restaurants and don’t think I have ever seen one in New England.  But options on the stock are extremely interesting to me.  The Feb-13 options that expire on Friday, February 15th carry an implied volatility (IV) of 80 while longer-term options such as the Jun-13 series has an IV of only 36.  That means the February options are more than twice as expensive as the June options. 

 

I would like to buy June options and sell February options before Wednesday’s announcement. 

 

I learned everything I could about the company, and wrote an article for Seeking Alpha on it – How To Play The Buffalo Wild Wings Earnings Announcement Next Week.  The most important thing I learned was that some big options players were betting that the stock would tank after earnings (and Jim Cramer suggested selling it as well).  I thought the P/E was too high considering its growth rate which put me in the bearish camp as well.  All these ideas suggested to me that the stock was more likely to fall next week than it is to move higher. 

 

With that scenario in mind, here is the spread that I will be buying (for a $5000 portfolio) with the stock trading about $77: 

 

BTO (buy to open) 6 BWLD Jun-13 85 calls (BWLD130622C85)

 

STO (sell to open) 6 BWLD Feb-13 80 calls (BWLD130216C80) for a debit of $1.40  (buying a diagonal)  

 

If the stock stays flat or goes down by any amount by Friday’s close, the Feb-13 80 calls will expire worthless and I will end up holding Jun-13 85 calls which should have a value well in excess of $1.40 (they are worth $3.60 right now).  The greatest gain for this spread would be if the stock edged up to $80 and the February calls expired worthless while the June calls might be worth more than they are right now.  You can see how this spread can make money even if you aren’t right about how you think about the stock. 

 

The above diagonal spread would require a maintenance requirement of $500 per spread in addition to the $140 cost to buy the spread.  This is not a loan like a margin purchase would involve, but the broker puts a hold on $500 in your account that can’t be used for other purposes.  The reason for this maintenance requirement is that theoretically you could lose that much if the stock rose sharply and you had to buy back the Feb-80 calls, and then you did nothing for five months and let the June options expire worthless.  Of course, since the June options have five additional months of life, they would have a good value if you sold them next week instead of waiting.  This means that from a practical standpoint, the $500 potential loss is not really totally at risk because you plan to sell the June options next week while they still have a good value.  

 

Just in case I am wrong in my assessment of this company, I will also place the following diagonal spread:

 

BTO (buy to open) 4 BWLD Jun-13 70 puts (BWLD130622P70)

 

STO (sell to open) 4 BWLD Feb-13 75 puts (BWLD130216P75) for a debit of $.90  (buying a diagonal)  

 

There will not be a maintenance requirement on this spread because you can’t lose $500 on both this spread and the call spread placed above.  This put spread will do best if the stock falls to $75 and expires worthless while the June 70 puts should increase in value (currently $3.80).  If the stock moves higher, above $75, the February 75 puts expire worthless and the June 70 puts will retain some value because they have five more months of remaining life. 

 

If the stock ends up between $75 and $80, both spreads should make excellent gains.  Losses should come about only if the stock moves over 8% on the upside or over 10% on the downside.  That is quite a large range of possible prices for the two days the options will be held.  

 

If you are totally bearish on the stock you would only place the diagonal call spread.  If you are strongly bullish on the stock you would only place the diagonal put spread. It seems a little ironic that the best spread to buy if you think the stock is headed down uses calls while the best spread to buy if you think the stock is headed higher uses puts. But that’s the way it is in the crazy world of options. 

I expect these spreads will yield at least the 30% I made last week while being wrong about GMCR.  Just imagine how much you could make if you were right.

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