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Posts Tagged ‘Earnings Option Strategy’

Comparing Calendar and Diagonal Spreads in an Earnings Play

Monday, December 5th, 2016

Last week, in one of our Terry’s Tips portfolios, we placed calendar spreads with strikes about $5 above and below the stock price of ULTA which announced earnings after the close on Thursday. We closed out our spreads on Friday and celebrated a gain of 86% after commissions for the 4-day investment. It was a happy day.

This week, this portfolio will be making a similar investment in Broadcom (AVGO) which announces earnings on Thursday, December 8. I would like to tell you a little about these spreads and also answer the question of whether calendar or diagonal spreads might be better investments.

Terry

Comparing Calendar and Diagonal Spreads in an Earnings Play

Using last Friday’s closing option prices, below are the risk profile graphs for Broadcom (AVGO) for options that will expire Friday, December 9, the day after earnings are announced. Implied volatility for the 9Dec16 series is 68 compared to 35 for the 13Jan17 series (we selected the 13Jan17 series because IV was 3 less than it was for the 20Jan17 series). The graphs assume that IV for the 13Jan17 series will fall from 35 to 30 after the announcement. We believe that this is a reasonable expectation.

The first graph shows the expected profit and loss at the various prices where the stock might end up after the announcement. Note that the maximum expected gain in both graphs is almost identical and it occurs at any ending price between $160 and $170. The first graph has calendar spreads at the 160 strike (using puts) and the 170 strike (using calls). The cost of placing those spreads would be $2375 at the mid-point of the spread quotes (your actual cost would probably be slightly higher than this, plus commissions). The maximum gain occurs if the stock ends up between $160 and $170 on Friday (it closed at $164.22 last Friday), and if our assumptions about IV are correct, the gain would exceed 50% for the week if it does end up in that range.

AVGO Calendar Spreads December 2016

AVGO Calendar Spreads December 2016

This second graph shows the expected results from placing diagonal spreads in the same two series, buying both puts and calls which are $5 out of the money (i.e., $5 lower than the strike being sold for puts and $5 higher than the strike being sold for calls). These spreads cost far less ($650) but would involve a maintenance requirement of $2500, making the total amount tied up $3150.

We also checked what the situation might be if you bought diagonal spreads where the long side was $5 in the money. Once again, the profit curve was essentially identical, but the cost of the spreads was significantly greater, $4650. Since the profit curve is essentially identical for both the calendar spreads and the diagonal spreads, and the total investment of the calendar spreads is less than it would be for the diagonal spreads, the calendar spreads are clearly the better choice.

AVGO Diagonal Spreads December 2016

AVGO Diagonal Spreads December 2016

AVGO has a long record of exceeding estimates. In fact, it has bested expectations every quarter for the last three years. The stock does not always go higher after the announcement, however, and the average recent change has been 6.5%, or about $7.40. If it moves higher or lower than $7.40 on Friday than where it closed last Friday, the risk profile graph shows that we should make a gain of some sort (if IV of the 13Jan17 options does not fall more than 5).

You can’t lose your entire investment with calendar spreads because your long options have more weeks or months of remaining life, and will always be worth more than the options you sold to someone else. But you can surely lose money if the stock fluctuates too much. Options involve risk and are leveraged investments, and you should only invest money that you can truly afford to lose.

Happy trading.

Terry

Option Idea Which Must Be Executed Before Market Closes November 1st

Tuesday, November 1st, 2016

Option Idea Which Must Be Executed Before Market Closes November 1st

I am sorry to send you a second email message today, but I need to hurry because it will disappear tomorrow.  It involves Gilead Sciences (GILD)

Gilead (GILD) announces earnings on Tuesday, November 1st after the close.  The post-announcement options are extremely expensive.  Implied Volatility (IV) for the 04Nov16 series is 60 compared to 34 for the 16Dec16 series which expires six weeks later.  The company has fallen 32% from its 52-week high and pays a dividend of 2.5% and has a p/e of only 6.4 which should provide some level of support. Expectations are for lower sales and earnings.  These facts support the idea that a big drop in stock price is unlikely after the announcement.  This trade will make money if the stock is flat or goes up by any amount (a maintenance requirement of $400 per spread, less the amount of the credit, will result):

Buy To Open 1 GILD 16Dec16 70 put (GILD161216P70)

Sell To Open 1 GILD 04Nov16 74 put (GILD161104P74) for a credit of $.25  (buying a diagonal)

We bought 5 contracts of exact spread today in our portfolio that trades on earnings announcements.  It will make a maximum gain if the stock closes on Friday exactly at $74.  Any price higher than that will also result in a profit.  The stock should be able to fall about $2 before any loss should appear on the downside.

This is the risk profile graph for this spread, assuming that IV for the 16Dec16 series falls by 5 after the announcement:

GILD Risk Profile Graph Oct 31 2016

GILD Risk Profile Graph Oct 31 2016

The theoretical risk of this investment is $375 (the $400 maintenance requirement less the $25 received).  However, since we plan to close the spread on Friday and there will still be 6 weeks of remaining life for the 16Dec16 70 put, the actual risk is far less than $375.  That is the amount that you will tie up in your account for this week, however.

You can see that if the stock is flat or moderately higher on Friday, you will make a profit of about $100 on your $475 investment, or about 25%.  Not bad for a week.

If the stock falls by more than $2, the graph indicates that a loss would result.  Since we believe the low valuation and the high dividend rate both provide a solid support level for the stock, we don’t believe the stock will fall by very much, and we feel good about making this investment.

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Happy trading.

Terry

P.S.  If you would have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595.  Or make this investment in yourself at the lowest price ever offered in our 15 years of publication – only $39.95 for our entire package.  Get it here using Special Code HWN16 (or HWN16P for Premium Service – $79.95).   Do it today, before you forget and lose out.  This offer expires at midnight tonight, October 31, 2016.

 

IBM Pre-Announcement Play

Friday, September 30th, 2016

IBM announces earnings on October 17, less than three weeks from now. I would like to share with you a strategy I used today to take advantage of the extremely high option prices which exist for the option series that expires on October 21, four days after the announcement. I feel fairly confident I will eventually make over 100% on one or both of these trades before the long side expires in six months.

Terry

IBM Pre-Announcement Play

One of my favorite option strategies is to buy one or more calendar spreads on a company that will be announcing earnings in a few weeks. The option series which expires directly after the announcement experiences an elevated Implied Volatility (IV) relative to all the other option series. A high IV means that those options are relatively expensive compared to all the other options that are trading on that stock.

IV for the post-announcement series soars because of the well-known tendency for stock prices to fluctuate far more than usual once the announcement is made. It may go up if investors are pleased with the company’s earnings, sales, or outlook, or it may tumble because investors were expecting more. While there is some historical evidence that the stock usually moves in the opposite direction that it did in the week or two leading up to the announcement, it is not compelling enough to always bet that way.

IBM has risen about $5 over the last week, but it is trading about equal to where it was two weeks ago, so there is no indication right now as to what might happen after the announcement.

IBM has fluctuated by just under 4% on average over the last few announcement events. That would make an average of $6 either way. I really have no idea which way it might go after this announcement, but it has been hanging out around it/s current level (just under $160) for a while, so I am planning to place my bet around that number

In the week leading up to the announcement, IV for the post-announcement series almost always soars, and the stock often moves higher as well, pushed higher by investors who are expecting good news to be forthcoming. For that reason, I like to buy calendar spreads at a strike slightly above the current price of the stock in hopes that the stock will move toward that strike as we wait for the announcement day. Remember, calendar spreads make the greatest gain when the stock is exactly at the strike price on the day when the short side of the spread expires.

This is the trade I placed today when IBM was at $159 (of course, you may choose any quantity you are comfortable with, but this is what each spread cost me):

Buy To Open 1 IBM 21Apr17 160 call (IBM170421C160)
Sell To Open 1 IBM 21Oct16 160 call (IBM161021C160) for a debit of $4.71 (buying a calendar)
Each spread cost me $471 plus $2.50 (the commission rate charged to Terry’s Tips subscribers at thinkorswim), for a total of $473.50. I sold the 21Oct16 160 call for $354. In order to get all my $473.50 back once October 21st rolls around, I will have 25 opportunities to sell a one-week call (if I wish). Right now, a 160 call with one week of remaining life could be sold for about $.90. If I were to sell one of these weeklies on 6 occasions, I would get my entire investment back and still have 19 more opportunities to sell a weekly call.

Another way of moving forward would to sell new calls with a month of remaining life when the 21Oct16 calls expire. If IBM is around $160 at that time, a one-month call could be sold for about $2.00. It would take three such sales to get all of my initial investment back, and I would have three more opportunities to sell a one-month call with all the proceeds being pure profit.

Before the 21Apr17 calls expire, another earnings announcement will come around (about 3 ½ months from now). If IBM is trading anywhere near $160 at that time, I should be able to sell a 160 call with 3 weeks of remaining life for about $354, just like I sold one today. That alone would get about 75% of my initial investment back.

In any event, over the six-months that I might own the 21Apr17 calls, I will have many chances to sell new calls and hopefully collect much more time premium than I initially shelled out for the calendar spread. There may be times when I have to buy back expiring calls because they are in the money, but I should be able to sell further-out short-term calls at the same strike for a nice credit and whittle down my initial investment.
I also made this trade today:

Buy To Open 1 IBM 21Apr17 160 call (IBM170421C160)
Sell To Open 1 IBM 14Oct16 160 call (IBM161014C160) for a debit of $6.65 (buying a calendar)

This is the same calendar spread as the first one, but the sell side is the 14Oct16 series which expires a week before the announcement date week. If IV for the 21Oct16 series does escalate from its present 25 (as it should), I might be able to sell calls with a week of remaining life for a higher price than is available right now. I might end up with paying less than $473.50 for the original spread which sold the post-announcement 21Oct16 calls.

Calendar Spreads Tweak #4

Wednesday, September 21st, 2016

Today I would like to discuss how you can use calendar spreads for a short-term strategy based around the date when a stock goes ex-dividend. I will tell you exactly how I used this strategy a week ago when SPY paid its quarterly dividend.

Terry

Calendar Spreads Tweak #4

Four times a year, SPY pays a dividend to owners of record on the third Friday of March, June, September, and December. The current dividend is about $1.09. Each of these events presents a unique opportunity to make some money by buying calendar spreads using puts to take advantage of the huge time premium in the puts in the days leading up to the dividend day.

Since the stock goes down by the amount of the dividend on the ex-dividend day, the option market prices the amount of the dividend into the option prices. Check out the situation for SPY on Wednesday, September 14, 2016, two days before an expected $1.09 dividend would be payable. At the time of these prices, SPY was trading just about $213.70.

Facebook Bid Ask Puts Calls Sept 2016

Facebook Bid Ask Puts Calls Sept 2016

Note that the close-to-the-money options at the 213.5 strike show a bid of $1.11 for calls and $1.84 for puts. The slightly out-of-the-money put options are trading for nearly double the prices for those same distance-out calls. The market has priced in the fact that the stock will fall by the amount of the dividend on the ex-dividend day. In this case, that day is Friday.

SPY closed at $215.28 on Thursday. Friday’s closing price was $213.37, which is $1.91 lower. However, the change for the day was indicated as -$.82. The difference ($1.09) was the size of the dividend.

On Wednesday and Thursday, I decided to sell some of those puts that had such large premiums in them to see if there might be some opportunity there. While SPY was trading in the $213 to $216 range, I bought put calendar spreads at the 214.5, 214, 213.5, and 213 strikes, buying 21Oct16 puts at the even-strike numbers and 19Oct16 puts for the strikes ending in .5 (only even-number strikes are offered in the regular Friday 21Oct16 options). Obviously, I sold the 16Sep16 puts in each calendar spread.

Note: On August 30th, the CBOE offered a new series of SPY options that expire on Wednesday rather than Friday. The obvious reason for this offering involves the dividend situation. Investors who write calls against their SPY stock are in a real bind when they sell calls that expire on an ex-dividend Friday. First, there is very little time premium in those calls. Second, there is a serious risk that the call will be exercised by the holder to take the stock and capture the dividend. If the owner of SPY sold the series that expired on Wednesday rather than Friday, the potential problem would be avoided.

I paid an average of $2.49 including commissions for the four calendar spreads and sold them on Friday for an average of $2.88 after commissions. I sold every spread for more money that it cost (including commissions). My net gain for the two days of trading was just over 15% after commissions.

The stock fell $.82 (after accounting for the $1.09 dividend). If it had gone up by that amount, I expect that my 15% gain would also have been there. It is unclear if the gains would have been there if SPY had made a big move, say $2 or more in either direction on Friday. My rough calculations showed that there would still be a profit, but it would be less than 15%. Single-day moves of more than $2 are a little unusual, however, so it might not be much to be concerned about.

Bottom line, I am delighted with the 15% gain, and will probably try it again in three months (at the December expiration). In this world of near-zero interest rates, many investors would be happy with 15% for an entire year. I collected mine in just two days.

Trading SPY options is particularly easy because of the extreme liquidity of those options. In most cases, I was able to get an execution at the mid-point price of the calendar spread bid-ask range. I never paid $.01 more or received more than $.01 less than the mid-point price when trading these calendar spreads.

While liquidity is not as great in most options markets, it might be interesting to try this same strategy with other dividend-payers such as JNJ where the dividend is also over $1.00. I regularly share these kinds of trading opportunities with Terry’s Tips Insiders so that they can follow along in their own accounts if they wish.

Happy trading.

Update on Facebook Earnings Announcement Play

Monday, August 1st, 2016

Last week, Facebook (FB) announced earnings which were triple the year-earlier results and were 88% higher than analyst expectations, but the stock barely budged from where it was the day before the announcement. Option players could celebrate, however. The actual portfolio at Terry’s Tips where we trade FB options gained 45.8% for the week. We have a lot of happy subscribers who follow this portfolio either on their own or through the Auto-Trade service at thinkorswim.

As good as 45% for a single week might be, you could have done even better if you had followed a trade I told you about 2 ½ months ago. That is the story I would like to share with you today.

Happy trading.

Terry

Update on Facebook Earnings Announcement Play

On May 11, 2016, I told you about two trades I was making in my personal account. You can see the entire blog which explains my thinking on our blog page. Here they are:

Today, I bought these calendar spreads on FB when the stock was trading just about $120:

Buy To Open 2 FB 16Sep16 120 calls (FB160916C120)
Sell To Open 2 FB 15Jul16 120 calls (FB160715C120) for a debit of $3.26 (buying a calendar)

Buy To Open 2 FB 16Sep16 125 calls (FB160916C125)
Sell To Open 2 FB 15Jul16 125 calls (FB160715C125) for a debit of $3.11 (buying a calendar)

My total investment for these two spreads was $1274 plus $10 commission (at the rate charged to Terry’s Tips subscribers at thinkorswim), for a total of $1284.

When these short calls expired on July 15th, FB was trading at about $122.50, just about the perfect place for me since it was right in the middle of the two strike prices of my spreads. On that day, I bought back the expiring 120 calls and sold 29Jul16 120 calls and collected $2.50 (selling a calendar spread). I sold this series because it would expire just after the July 27 earnings announcement.

I also sold the same calendar spread at the 125 strike price and collected $2.35. The net effect of these two trades (I collected $960 after commissions) reduced my net investment from $1284 to $324.

After Wednesday’s announcement, FB soared to $130 in after-hours trading, but opened at $127.52, and by late Friday when my short options were about to expire, it had fallen to about $124. I then closed out my positions by buying back the 29Jul16 calls and selling the 16Sep16 calls I still owned, collecting $2.10 per contract for the 120 strike calls and $3.10 for the 125 strike calls. After commissions, this worked out to a total of $1030, so I netted a profit of $706 on an original investment of $1284. Bottom line, I made 55% on my original investment for the 10 weeks I traded FB options.

Over this same time period, investors who owned FB stock made $4 per share on their money. If they invested $1284 like I did, they could have bought only 10 shares for $120 per share. Their gains for the 10 weeks would have been $40. My option trading made 17 times more money than the stock buyers would have made. Once again, I don’t understand why people would waste their money buying stock when they could spend a little time studying how to trade options, and make a multiple of what they could make by the simple buying of stock.

As with all investments, you should only use money that you can truly afford to lose. Options are leveraged investments, and unless you totally understand the risks, you can easily and quickly lose more money than you could with the equivalent investment in the purchase of stock. I think it is worth a little work to educate yourself about the risks (and potential rewards) of trading options.

How to Trade Out of an Earnings-Related Options Play

Thursday, July 7th, 2016

A little over a week ago, I told you about trades I was making in advance of Nike’s earnings announcement. Lots of things didn’t quite work out the way I had expected they would, but I still managed to make over 50% for the week on my trades. There were some good learning experiences concerning how to trade out of calendar spreads once the announcement has been made. You need to tread water until the short options you sold expire and you can close out the spreads, and that can present some challenges.

Today I would like to share those learning experiences with you in case you make similar trades prior to a company’s earnings announcement.

Happy trading.

Terry

How to Trade Out of an Earnings-Related Options Play

According to Openfolio, a site where about 70,000 users share information on their investments, three out of four investors lost money in June, with an average return of -0.10%. This compares to the results of the Terry’s Tips’ Auto-Traded portfolios where 7 of 8 portfolios gained, and the average gain was 15.1%. Our only losing portfolio was a special bet that the short-term price of oil would fall. It didn’t, and we lost a little, but that was nothing compared to 4 of the portfolios which gained over 20% for the month.

One of our portfolios trades options on Nike (NKE) which announced earnings after the close last Tuesday, June 28. We had spreads in place similar to those that I told you about last week (and several others as well). The portfolio managed to gain 29% in June, something that often happens during the month when an earnings announcement takes place.

On the Monday before the earnings announcement, with the stock trading at about $52, I placed these trades (at higher quantities):

Buy to Open 1 NKE 29Jul16 52.5 put (NKE160729P52.5)
Sell to Open 1 NKE 1Jul16 52.5 put (NKE160701P52.5) for a debit of $.50 (buying a calendar)

Buy to Open 1 NKE 29Jul16 55 call (NKE160729C55)
Sell to Open 1 NKE 1Jul16 55 call (NKE160701C55) for a debit of $.50 (buying a calendar)

In my note to you, I said I thought you could buy these spreads for $.43 ($43) each, but that was based on the prior Friday’s prices. I was disappointed to have to pay so much more, but I still believed it was a pretty good bet.

When the stock fell closer to $51, I bought half as many spreads as the above two at the 50 strike just in case the stock continued to trade lower. When you buy calendar spreads, you select strike prices where you hope the stock will end up when the short options expire, as the at-the-money strike spread will be the most profitable. Buying spreads at several strikes gives you more places where you can end up being happy, but your maximum gain is reduced a bit when you buy the increased protection that owning several strikes provides.

After I made the above trades on Monday, I suffered my second disappointment. As I had seen so many times before, in the last day before the announcement (Tuesday), the stock rallied $1.10 and closed at $53.09. If I had anticipated this better, I would not have bought the spreads at the 50 strike. In after-hours trading after the announcement (earnings were a penny above estimates but sales disappointed a little and outlook was about what was expected), the stock tanked to about $50. As we have often seen, this initial move was quickly reversed. When the market opened on Wednesday, it had moved up to $54.50.

While my positions were showing a nice paper profit at the open on Wednesday, I had to wait to near Friday’s close to get the full amount I was hoping for. I was in a bad position, however, because most of my spreads were at strike prices which were below the stock price. In option terms, my positions were negative net delta – this means that if the stock went up another dollar, I would lose money. I aggressively changed to a neutral net delta condition by closing out the lowest-strike put calendars (at the 50 strike) and changing some 52.5 calendars to diagonals, buying back in-the-money 52.5 short calls and replacing them with at-the-money 55 calls and slightly out-of-the-money 56 calls in the same 01Jul16 series.

Then I encountered my third disappointment. I had expected implied volatility (IV) of the long 29Jul16 series to be 27 after the announcement based on recent history, but it ended up being 24 which dampened my expected results. That meant the option prices would not be as high as I expected when I went to sell them. I had figured an at-the-money spread could be sold for $1.40, and the closest spread I had (the 55 strike) only yielded $.97 (however, this was almost double what I paid for it). By Friday, the stock moved above the top strike price I held (55) and closed at $55.61. Since I managed to stay neutral net delta and actually pick up some extra premium in the last three days from the new at-the-money calls I sold, I ended up making over 50% on my total investment for the week. It was a lot of work but surely worth the effort.

I had set out to make 100% in a single week, and experienced disappointments in three different areas, but at the end of the day, I was pleased to take in half that amount for the week.

What could be taken away from this play was; 1) that the stock often rises in the last day before the announcement (probably legging into the calendars would have been more profitable, but more risky), 2) the initial move after the announcement is usually reversed, and 3) it is important to make adjustments to create a neutral net delta condition for all your spreads until the short options expire.

An Options Play on Facebook Which Should Make 50% in 60 Days

Wednesday, May 11th, 2016

Today I would like to suggest an options trade on Facebook (FB). It will involve waiting 6 weeks to close out. Many option players have short attention spans and don’t like to wait that long. On the other hand, I think this trade has a very high likelihood of making a profit of at least 50%, even if the stock fluctuates more than we might like. To my way of thinking, it should be worth the wait, especially since I think that there is a very small likelihood that this play would end up losing money.

Terry

An Options Play on Facebook Which Should Make 50% in 60 Days

Over the past month I have suggested legging into calendar spreads in advance of an earnings announcement for 7 different companies (FB, COST, TWX, TGT, SBUX, and JNJ, and ABBV). In every case, I was personally successful at creating a calendar spread at a credit and guaranteeing myself a profit no matter where the stock price ended up after the announcement. You should have been able to duplicate every one of these successes as well. I got a kick out of having 7 consecutive winning trades, some of which made me more than 100% on my amount at risk.

The ultimate gain on these spreads will depend on how close the stock ends up to the strike price of my calendar spread after the announcement. The nearer to the strike, the greater the gain. It is fun owning a spread that you are certain will make a profit, no matter what the stock does.

Today’s idea is a little different. We will not be guaranteed a profit, but it looks quite likely to happen if our assumptions hold up. In each of the last two quarters when FB announced earnings, they were better than the market expected, and the stock rallied nicely. Who knows what will happen next time around when they announce once again on July 27?

If history is any indication, the stock price for FB doesn’t fluctuate very much between announcement dates. It tends to be fairly flat, or edges up a bit in the lulls between announcements, and often moves a little higher in the week or two before the announcement day.

Today, I bought these calendar spreads on FB when the stock was trading just about $120:

Buy To Open 2 FB 16Sep16 120 calls (FB160916C120)
Sell To Open 2 FB 15Jul16 120 calls (FB160715C120) for a debit of $3.26 (buying a calendar)

Buy To Open 2 FB 16Sep16 125 calls (FB160916C125)
Sell To Open 2 FB 15Jul16 125 calls (FB160715C125) for a debit of $3.11 (buying a calendar)

My total investment for these two spreads was $1274 plus $10 commission (at the rate charged to Terry’s Tips subscribers at thinkorswim), for a total of $1284.

Here is the risk profile graph which shows the profit or loss from those trades when the short options expire on July 15th:

 

Face book Risk Profile May 2016

Face book Risk Profile May 2016

You can see that if the stock ends up somewhere between $120 and $125 in two months, these spreads will make a gain somewhere near $550, or about 42% on the original investment. I think the stock is quite likely to end up inside this range. If I am wrong, and it falls by $5 or goes up by over $10, I will lose some money at that time, but in each case, the loss would be less than half my expected gain if it ends up where I expect it will.

As encouraging as this graph looks, I think it considerably understates how profitable the trades will be, and that has to do with what option prices do around earnings announcement dates. Since stock prices tend to have large fluctuations (both up and down) after the results are made public, option prices skyrocket in anticipation of those fluctuations.

When the 15Jul16 options expire on July 15, there will be a weekly options series available for trading that expires just after the July 27th announcement. It will not become available for trading until 5 weeks before that time, but it will be the 29Jul16 series.

Implied Volatility (IV) of the 15Jul16 series is currently 26 and the 16Sep16 series has an IV of 30. When the 29Jul16 series becomes available, IV will be much higher than either of these numbers, and should soar to near 60 when the announcement date nears (it grew even higher than that a few weeks ago before the last announcement). An IV that high means that an at-the-money call with two weeks of remaining life (which the 29Jul16 series would have when the 15Jul16 series expires), would be worth about $5, or almost double what the above calendar spreads cost us. If this were true, and if the stock is trading between $120 and $125, you could buy back the expiring 15Jul16 calls and sell the 29Jul16 calls at both strike prices for a credit which is greater than what you paid for the original calendar spread, and when those short calls expired, your long calls would still have 6 weeks of remaining life.

In other words, the strategy I have set up today by buying the above two calendar spreads is an admittedly complicated way to leg into two calendar spreads at a large credit, and guaranteeing an additional profit as well. The risk profile graph doesn’t reflect the fact that IV will soar for the 29Jul16 series that doesn’t exist yet, and the indicated gains are drastically understated.

I will update these trades as we move forward, and let you know if I make any adjustments. If the stock moves up to $125 in the next few weeks, I would probably add a third calendar spread at the 130 strke. That is about the only likely adjustment I can think of at this point, unless the stock falls to $115 when I would probably buy the same calendar spread at the 115 strike.

If you make this investment, as is true with all options investments, you should do it only with money that you can truly afford to lose. If you do choose to make it, I wish both of us luck over the next two months.

 

More Legging Into Pre-Announcement Calendar Option Spreads

Tuesday, May 3rd, 2016

Over the past month I have suggested legging into calendar spreads in advance of an earnings announcement for 4 different companies. In every case, you should have been able to duplicate my success in creating a calendar spread at a credit. These spreads are absolutely guaranteed to make a profit since the long side of the spreads has more time remaining and will always be worth more than the short side, regardless of what the stock does after the earnings announcement.

Today I would like to suggest two more companies where I am trying to set up calendar spreads at a credit.

Terry

More Legging Into Pre-Announcement Calendar Option Spreads

First, an update on the Facebook (FB) pre-earnings play I suggested last week. Earlier, I showed how you could leg into a calendar spread in FB at the 110 strike, and this proved to be successful. In addition, last week I suggested something different – the outright buying of 17JUN16 – 29APR16 calendar spreads at the 105 strike (using puts and paying $1.58), the 110 strike (using puts and paying $1.52) and the 115 strike (using calls and paying $1.52). I was able to execute all three of these spreads in my account at these prices, and you should have been able to do the same.

As you probably know, FB reported blow-out numbers, and the stock soared, initially to over $121, but then it fell back to $117 near the close on Friday the 29th. We were hoping that the stock could end up inside our range of strikes (105 – 115) but we were not so lucky. At 3:00 on Friday, I sold these three spreads for $.95, $1.82, and $3.40 for a total of $6.17 for all 3. This compared to a cost of $4.62 for the 3 spreads. Deducting out $15 in commissions, I netted $1.40 ($140) for every set of three calendar spreads I had put on. While this was a disappointing result, it worked out to 22% on the investment in only 4 days. I enjoyed the thrill of holding a possible 100% gain (if the stock had ended up at $110 instead of $117) and still managed to make a greater return than most people do in an entire year.

This week, on Monday morning, I looked at Costco (COST), (one of my favorite stocks) which reports earnings on May 25. The options series that expires just after this announcement is the 27MAY16 series. With the stock at about $148.50, I bought 10JUN16 150 calls (which expire two weeks later than the 27MAY16 options), paying $2.90. Implied Volatility (IV) for those options was 21 and the 27MAY16 series was only 22. I expect the difference between these IVs to get much higher over the next couple of weeks (mostly, the 27MAY16 series should move higher).

I immediately placed an order to sell the 27MAY16 150 calls (good-til-cancelled order) for $3.05 which would give me a credit of $.15 ($15 less $2.50 commissions). The stock shot $2 higher and this order executed less than 2 hours after I placed it. I apologize that I didn’t send this out to you in time for you to duplicate what I did.

I still like the company and its prospects, so I placed another order to buy 10JUN16 152.5 calls, paying $2.56 when COST was trading at $150.80. I then placed a good-til-cancelled order to sell 27MAY16 152.5 calls for $2.65. That has not executed yet.

Another company that looked interesting was Target (TGT) which announces earnings before the bell on May 18. IV for the 20MAY16 series was 27, only barely higher than the 3JUN16 series of 24 (this difference should get bigger). When the stock was trading about $79.40, I bought 3JUN16 79.5 calls for $1.88 and immediately placed an order to sell 20MAY16 calls for $1.95. This order executed about 2 hours later when the stock rose about $.60. Once again, I apologize that I did not get his trade possibility out to you in time for you to copy it.

Tomorrow I intend to buy TGT 3JUN16 81 calls and as soon as I get them, I will place an order to sell 20MAY16 81 calls for $.10 more than I paid for them. If the stock rises or IV of the 20MAY16 options gets larger (as it should), another credit calendar guaranteed profit spread should be in place.

In the last few weeks, I have both told you about and used this strategy for SBUX, JNJ, FB, and TWX. Now I have added COST and TGT to the list. In each case, I bought a slightly out-of-the-money call a few weeks out and immediately placed an order to sell the post-announcement same-strike call so that I would create a calendar spread at a credit.

The ultimate gain on these spreads will depend on how close the stock ends up to the strike price of my calendar spread after the announcement. The nearer to the strike, the greater the gain. It is fun owning a spread that you are certain will make a profit, no matter what the stock does.

Last Minute Facebook Earnings Play

Tuesday, April 26th, 2016

Facebook (FB) announces earnings tomorrow, Wednesday the 27th, after the close. There is still time to place what I think will be a dynamite options play. You have until the close tomorrow to get these spreads in place.

Terry

Last Minute Facebook Earnings Play

Over the past few weeks, I have suggested legging into calendar spreads at a price slightly above the current stock price for companies that would be announcing earnings about two or three weeks later. The underlying idea of these spreads is that, 1) in the days leading up to the announcement, the stock tends to drift higher as hope for a positive announcement grows and, 2) implied volatility (IV) of the option series that expires directly after the announcement date almost always soars because big moves in the stock often take place right after results are disclosed.

In my personal account, in the last few weeks, I have both told you about and used this strategy for SBUX, JNJ, and FB. In each case, I bought a slightly out-of-the-money call a few weeks out and immediately placed an order to sell the post-announcement same-strike call so that I would create a calendar spread at a credit.

In every case, I was able to complete the calendar spread at a credit which was large enough to cover the cost of the call I had bought as well as commissions on the trade ($1.25 per option at the commission rate thinkorswim charges Terry’s Tips subscribers). This means I not only made a small profit at the time, but I was guaranteed a much larger profit when the short calls expired. The closer the stock price ends up to the strike price, the greater that profit will be.

Last week, I also tried this strategy with Time Warner (TWX), another company I like. I bought 27 May 16 76 calls when TWX was trading at $75.50, paying $2.31. I immediately placed a good-til-cancelled order to sell 6 May 16 76 calls for $2.39. This was executed the following day, and I now own a calendar spread that is guaranteed to make me a profit. TWX announces on May 4 before the open and I will close out the calendar two days later when the 6 May 16 calls expire.

There is something wonderful about owning an option spread that is guaranteed to make a profit. The only question mark is how big that profit will be.

FB announces after the close tomorrow, April 27. It is too late to leg into a calendar spread like I did for the above 4 companies, but it is not too late to take advantage of some huge IV advantages. IV for the 29 APR 16 series has soared to 82 (it was “only” 52 a week ago). IV for the 17 JUN 16 series is only 34. These IVs make the FB calendar spreads exceptionally cheap right now, at least to my way of thinking.

With FB trading about $109 today, these are the calendar spreads I have placed:

Buy to Open FB 17 JUN 16 105 puts (FB160617P105)
Sell to Open FB 29 APR 16 105 puts (FB160417P105) for a debit of $1.58 (buying a calendar)

Buy to Open FB 17 JUN 16 110 puts (FB160617P110)
Sell to Open FB 29 APR 16 110 puts (FB160417P110) for a debit of $1.52 (buying a calendar)

Buy to Open FB 17 JUN 16 115 calls (FB160617C115)
Sell to Open FB 29 APR 16 115 calls (FB160417C115) for a debit of $1.52 (buying a calendar)

These prices are a little more than the mid-point of the bid-ask range for the calendar spreads. You should be able to get these prices.

On Friday when the short options expire, an at-the-money calendar spread with 49 days of remaining life (as these are) should be worth over $5, or more than what I paid for all three spreads. If the stock is $5 higher or lower than a strike, the calendar should be worth over $2.50, well more than what any of the spreads cost.

I think these are good trades to make and am hoping for a $110 price for FB on Friday near the close. If that comes about, I should more than double my investment in less than a week.

 

How to Play the Upcoming Facebook Earnings Announcement

Wednesday, April 20th, 2016

Over the last 3 weeks, I have suggested a way to leg into calendar spreads at a credit in advance of the earnings announcement for Starbucks (SBUX), Facebook (FB), and Abbvie (ABBV). All three calendars ended up being completed, and all three have already delivered a small profit. Once earnings are announced and the short side of the calendar spread expires, all three spreads are guaranteed to produce a much larger profit as well (depending on how close the stock price is to the strike price).

Today I would like to discuss another Facebook play. While this one does not guarantee profits, I believe it is even more exciting in many ways. It is possible that you could double your money in less than two weeks. I also believe it is extremely unlikely to lose money.

Terry

How to Play the Upcoming Facebook Earnings Announcement

All sorts of articles have been written over the past few weeks about the prospects for FB, some positive and some negative. We will all learn who was right and who was wrong late next week when FB announces earnings on April 27, and the details of the company’s large assortment of new and wondrous initiatives will be disclosed.

The high degree of uncertainty over the announcement has caused implied volatility (IV) of the options to soar, particularly in the series that expires two days after the announcement. Those Apr5-16 options carry an IV of 52. This compares to only 35 for longer-term option series and 32 for the Apr4-16 series which expires this week.

Buying calendar spreads at this time represents one of the best opportunities I have ever seen to buy cheap options and sell expensive options against them. The FB calendar spreads are exceptionally cheap right now, at least to my way of thinking.

I have written an article which was published by TheStreet.com today which describes the actual calendar spreads I have bought yesterday and today (and I have bought a lot of them). The article fully explains my thinking as to which spreads I purchased. Read the full article here.

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