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Posts Tagged ‘CRM’

Updates on ANF and CRM PEA Plays

Friday, May 24th, 2013

Updates on ANF and CRM PEA Plays

Here are the trades we placed for ANF this week:

May 21, 2013  Trade AlertPEA Picker  Portfolio – LIMIT ORDERS

I wrote a Seeking Alpha article about this trade if you care to see it – How To Play The Abercrombie & Fitch May Earni…  In the article I suggested buying June options for the long side but have since noticed that the July options offer more value and have a 6-point lower IV than the June options.  I have also expanded the break-even range to about 15% on the downside and 8% on the upside at the cost of making a very small gain if the stock falls by just a couple of dollars.  I have assumed that IV of the July options will fall by 8 (from 48 to 38).  These trades are being made with ANF trading about $54.25.

BTO 6 ANF Jul-13 52.5 calls (ANF130720C52.5)
BTO 6 ANF Jul-13 52.5 puts (ANF130720P52.5) for a debit limit of $7.25  (buying a straddle)

If that executes:

STO 3 ANF May4-13 48 put (ANF130524P48)
STO 3 ANF May4-13 56 call (ANF130524C56) for a credit limit of $2.11  (selling a strangle)

STO 3 ANF May4-13 49 put (ANF130524P49)
STO 3 ANF May4-13 57 call (ANF130524C57) for a credit limit of $1.93  (selling a strangle)

May 23, 2013  Trade AlertPEA Picker  Portfolio

We have a weak spot in the risk profile graph curve and this little trade will fix it:

BTO 2 ANF Jul-13 52.5 puts (ANF130720P52.5)
STO 2 ANF May4-13 52.5 puts (ANF130524P52.5) for a debit of $1.37  (buying a calendar)

When the announcement was made, the stock fell sharply by about $5.50, or about 10% below it was when we placed our spreads.

Both of the strangles that we sold on the first day essentially expired worthless (we bought back the expiring short options for a minimal price (paying no commission on them at thinkorswim).  Those strangles served to reduce the cost of the original straddle we bought from $7.25 to about $5.25.  When we sold that straddle for $5.72, we made a gain of about $240 after commissions on an initial investment of $3150, or 7.6%.

A significant factor in the disappointing gain was that IV fell to 34 compared to the 38 I was expecting.  This meant we got lower prices than we hoped for when we sold the July options.

It wasn’t a great gain, but it did manage to continue our winning streak of these PEA Plays using our Expectation Model from 8 consecutive wins to 9.

And our second PEA Play this week: SalesForce.com (CRM)

This was an interesting challenge because our Expectation Model predicted that since expectations were so high, a lower price would come about after the announcement.  This prediction was countered by the strong record of the stock moving higher after announcing, even when earnings did not best estimates.  Over the last four quarters the stock had moved higher an average of 6.7% after announcing, so we were a little scared to place all our money on a weaker market. 

May 21, 2013  Trade AlertPEA Picker  Portfolio – LIMIT ORDERS

I wrote a Seeking Alpha article about this play if you are interested – How To Play The Salesforce.com Earnings Annou…

In this article I suggested buying June options for the long side but I have since noticed that the July options are less than $.50 more expensive and seem to have tighter bid-ask ranges.  These spreads should make a gain in either direction as long as the stock fluctuates less than 10% in either direction after the announcement, assuming that IV of the July options will only fall by 8 (from 36 to 28):

BTO 8 CRM Jul-13 50 puts (CRM130720P50)
STO 8 CRM May4-13 47.5 puts (CRM130524P47.5) for a debit limit of $2.47  (buying a diagonal)

BTO 5 CRM Jul-13 50 calls (CRM130720C50)
STO 5 CRM May4-13 50 calls (CRM130524C50) for a debit limit of $.76  (buying a calendar) 

May 23, 2013  Trade AlertPEA Picker  Portfolio

When we placed our trades near the open on Tuesday, the stock was trading about $2 higher than it is now.  In order to continue have a break-even range that extends about 10% in both directions, we need to establish some downside protection.  Fortunately, we can take off some of our diagonal spreads for a gain, and use the proceeds to add some calendar spreads at lower strike prices:

BTC 3 CRM May4-13 47.5 puts (CRM130524P47.5)
STC 3 CRM Jul-13 50 puts (CRM130720P50) for a credit of $2.62  (selling a diagonal)

BTO 3 CRM Jul-13 44 puts (CRM130720P44)
STO 3 CRM May4-13 44 puts (CRM130524P44) for a debit of $.98  (buying a calendar)

BTO 3 CRM Jul-13 42 puts (CRM130720P42)
STO 3 CRM May4-13 42 puts (CRM130524P42) for a debit of $.85  (buying a calendar)

BTO 3 CRM Jul-13 40 puts (CRM130720P40)
STO 3 CRM May4-13 40 puts (CRM130524P40) for a debit of $.64  (buying a calendar

After the announcement (when the company pretty much exceeded estimates, the stock fell a whopping $5.50, or about 10%.  In this instance our Expectations Model seemed to be a much better predictive value than the historical pattern of price changes after announcing.

The original diagonal spread we bought for $2.47 was sold for $2.65 (its intrinsic value was $2.50 and there was some remaining time premium value in the July 50 puts).  We lost on our the call calendar we placed just in case the stock moved higher (selling it for $.29 vs. our cost of $.76).  However, we gained on all three put calendar spreads, selling them for $1.32, $1.61, and $1.12.

In total, we had invested $2301 plus commissions of $52 after selling 3 of the diagonals for a small gain.  We had a gain of $371 less commissions of $41 for a net gain of $330 or 14% for the week.

IV of the July options fell much further than we expected, all the way to 30 compared to our estimate of 40, so even a 14% could have been much greater if the 60-day-out options had behaved as they did a quarter ago after earnings.

These were two of our lowest-netting PEA Plays but they did keep the string of successful trades going.  The portfolio that started out 7 weeks ago with $5000 has now had $6000 withdrawn from it and there is $5277 remaining in cash. 

We expect to invest only half our cash next week in a Joy Global (JOY) PEA Play.  JOY is the only company with weekly options that is reporting next week.

 

 

CRM Earnings Trade In PEA Picker Portfolio

Tuesday, May 21st, 2013

Today we placed the following orders in the PEA Picker portfolio at Terry’s Tips (this is the portfolio that has enjoyed eight consecutive gaining plays without a loss).

May 21, 2013 Trade Alert – PEA Picker Portfolio – LIMIT ORDER

I wrote a Seeking Alpha article about this play if you are interested – How To Play The Salesforce.com Earnings Annou…

In this article I suggested buying June options for the long side but I have since noticed that the July options are less than $.50 more expensive and seem to have tighter bid-ask ranges.  These spreads should make a gain in either direction as long as the stock fluctuates less than 10% in either direction (from its current price of $46.50) after the announcement, assuming that IV of the July options will only fall by 8 (from 36 to 28):

BTO 8 CRM Jul-13 50 puts (CRM130720P50)
STO 8 CRM May4-13 47.5 puts (CRM130524P47.5) for a debit limit of $2.48  (buying a diagonal)

BTO 5 CRM Jul-13 50 calls (CRM130720C50)
STO 5 CRM May4-13 50 calls (CRM130524C50) for a debit limit of $.78  (buying a calendar) 

Happy trading.
 
Terry

OptionsXpress Drops Auto-Trade

Monday, March 4th, 2013

OptionsXpress no longer offers their Auto-Trade service which enabled clients to follow their favorite newsletter’s recommendations without placing each trade themselves.

 

This is just another reason why thinkorswim is a much better alternative for anyone who wants to trade options, and you can now get over $300 worth of free services from us at the same time.

 

Use this link to sign up – open thinkorswim account – and once you have funded your account with at least $3500, email Seth@TerrysTips.com and let him know that you have done it, and this is what he will do – sign you for our Premium Service package ($119.95 value plus an extra 4 months of our Premium Service, valued at another $190.80). You get $300.65 worth of services without paying us one penny.

 

As another benefit, Terry’s Tips subscribers are eligible for lower commission rates that I can’t put in writing until you become a paid subscriber. These rates will apply to all of your option trades at thinkorswim, not just those where you might be following our trade alerts.

 

Even More Pre-Earnings-Announcement Plays

Case Study of a PEA Play (Salesforce.com): Last week, in two different Terry’s Tips portfolios we gained 24.8% in less than 24 hours with the following trades.   

 

In the week preceding the earnings announcement, several articles were published on Seeking Alpha that panned Salesforce.com (CRM).   

 

A sample, with a quote from each: 

 

What’s The Deal With Salesforce.com? 

 

“When viewed from the fundamentals, the current valuation of Salesforce is absurd.” 

 

Something Is Seriously Wrong With Salesforce 

 

“… at this dilutive speed, the Salesforce.com stock is little more than a Ponzi scheme.” 

 

Salesforce Earnings Preview: 7th Consecutive GAAP Loss Expected 

 

“What has occurred at Salesforce in recent years are efforts to maximize insider shareholder wealth with no regard to and to the exclusion of outside shareholders.” 

 

Other articles mentioned the huge amount of insider selling at the company – in the last six months, over $150 million was sold by company insiders, about 8% of their holdings.  (Most of the sales occurred in late December, 2012, however, and I concluded that it was largely due to efforts to avoid the capital gains tax increase that was expected to come about in 2013.)

 

In opposition to all this negativity about the company, we saw indications that the stock might not fall after earnings (as so many other companies have done).  There had not been a big run-up in the stock price leading up to the earnings announcement, whisper numbers were not higher than analysts’ expectations, and most important of all, the company had almost a perfect record of having higher stock prices after earnings, even when they missed expectations.   For those reasons, when we placed the positions in place, we allowed for more room on the upside than on the downside.

 

Here are the trades we placed:

 

February 28, 2013 Trade Alert – Earnings Eagle Portfolio – LIMIT ORDERS

 

These trades will get us set up for today’s earnings announcement after the close for Salesforce.com.  Our break-even range extends to about 7% on the downside and 10% on the upside and we only have one day of price changes to worry about:

 

BTO 4 CRM Apr-13 155 puts (CRM130420P155)
STO 4 CRM Mar1-13 155 puts (CRM130301P155) for a debit limit of $2.71  (buying a calendar)

 

BTO 4 CRM Apr-13 160 puts (CRM130420P160)
STO 4 CRM Mar1-13 160 puts (CRM130301P160) for a debit limit of $2.99  (buying a calendar)

 

BTO 3 CRM Apr-13 165 puts (CRM130420P165)
STO 3 CRM Mar1-13 165 puts (CRM130301P165) for a debit limit of $3.12  (buying a calendar)

 

BTO 3 CRM Apr-13 175 calls (CRM130420C175)
STO 3 CRM Mar1-13 175 calls (CRM130301C175) for a debit limit of $3.10  (buying a calendar)

 

BTO 4 CRM Apr-13 180 calls (CRM130420C180)
STO 4 CRM Mar1-13 180 calls (CRM130301C180) for a debit limit of $2.93  (buying a calendar)

 

BTO 4 CRM Apr-13 185 calls (CRM130420C185)
STO 4 CRM Mar1-13 185 calls (CRM130301C185) for a debit limit of $2.48  (buying a calendar)

 

These trades were placed with CRM trading about $169. These spreads cost $6365 to place including commissions ($55).  Note that the largest numbers of contracts were placed at the upper and lower extreme strike prices, and no spreads at all were at the at-the-money 170 strike.  These choices resulted in a relatively flat risk profile graph curve with a little more coverage on the upside than the downside.

 

There was a huge implied volatility (IV) advantage to our calendar spreads.  IV for the Mar1-13 weekly options was 100 compared to 36 for the Apr-13 options.  The big question was how much the April options would fall in value once earnings were announced.  We estimated that IV would fall by 5, (to 31) after the announcement.  With this assumption, the risk profile graph looked like this:

CRM Graph

 

The graph shows that a $1500 – $2000 gain might be expected if the stock made only a minimal change in value after the earnings announcement. We set out to create positions that would result in a gain if the stock rose less than 10% or fell less than 7% after the announcement, and the graph showed that we had that coverage.

 

What happened, however, was that IV of the April options fell all the way to 27, reducing the amount that we were able to gain on the trades. The stock opened up about $7 higher, at about $176. Here are the trade alerts that we issued and the prices we got for the spreads:

 

March 1, 2013 Trade Alert – Earnings Eagle Portfolio – LIMIT ORDERS

 

With the stock higher we will take these spreads off first:

 

BTC 4 CRM Mar1-13 155 puts (CRM130301P155) for $.03 (no commission)

 

STC 4 CRM Apr-13 155 puts (CRM130420P155) for $1.70

 

BTC 4 CRM Mar1-13 160 puts (CRM130301P160) for $.05 (no commission)

 

STC 4 CRM Apr-13 160 puts (CRM130420P160) for $2.50

 

March 1, 2013 Trade Alert #2 – Earnings Eagle Portfolio – LIMIT ORDERS

 

Now we will take this one off:

 

BTC 3 CRM Mar1-13 165 puts (CRM130301P165) for $.05 (no commission)

 

STC 3 CRM Apr-13 165 puts (CRM130420P165) for a limit of $2.20

 

March 1, 2013 Trade Alert #3 – Earnings Eagle Portfolio – LIMIT ORDERS

 

BTC 3 CRM Mar1-13 175 calls (CRM130301C175)
STC 3 CRM Apr-13 175 calls (CRM130420C175) for a credit limit of $4.80 (selling a calendar)

 

BTC 4 CRM Mar1-13 180 calls (CRM130301C180)
STC 4 CRM Apr-13 180 calls (CRM130420C180) for a credit limit of $5.75 (selling a calendar)

 

BTC 4 CRM Mar1-13 185 calls (CRM130301C185)
STC 4 CRM Apr-13 185 calls (CRM130420C185) for a credit limit of $4.90 (selling a calendar)

 

During the day, the stock moved higher, trading as high as $183.24 ($14 higher than it was when we placed our trades).

 

When we bought the calendar spreads on Thursday, February 28th, our cost was $6365. This entire amount was really not at risk because the long April options would always have a greater value than the Mar1-13 weekly options that we had sold, and we were planning on exiting all the trades on Friday, March 1 (so there would be no further decay in our long options).

 

We lost money on three of the six spreads we bought but the gain on the other three spreads was much greater than our losses on the losers. We collected $7985 from selling the spreads and paid $41.25 in commissions for a net receipt of $7943.75 and a gain of $1578.75 after commissions, or 24.8%.

 

We continue to learn. First, we underestimated how much IV falls after the announcement. Second, our idea that stock fundamentals are not as important as expectations in PEA Plays was reinforced (and historical results after earnings is also important). Third, taking off the spreads furthest away from the stock price early is the best way to go (all these spreads ended the day well below what we sold them for).

 

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