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Posts Tagged ‘Earnings Option Strategy’

How to Play the Green Mountain Coffee Roasters Earnings Announcement

Monday, May 6th, 2013

The spreads I suggested buying a week ago in advance of the Questor (QCOR) earnings announcement resulted in a gain of 13.6% for the week.  We were correct in the direction the stock would take (higher) but we underestimated how much it would rise.  We lost money on the calendar spread but made it back and more in the vertical spread we placed at the same time.

 

While we were disappointed with our return, 13.6% per week on an annualized basis works out to a pretty big number.

 

This week I am sharing what I believe is one of the best option investment possibilities I have seen in a very long time.

 

If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!

 

Terry

 

How to Play the Green Mountain Coffee Roasters Earnings Announcement

 

For the three following reasons, I believe that Green Mountain Coffee Roasters (GMCR) will exceed expectations when they announce earnings after the close on May 8, 2013:

 

  1. The company has matured under its new CEO (from Coca-Cola).
  2. Raw coffee prices have fallen steadily and single-cup prices have not been reduced.
  3. Hedge funds have started buying stock heavily.

 

Since there is often a big difference between how good earnings might be and what happens to the stock price, there seems to be conflicting indications on what the price of GMCR might be at the end of the week.  Most importantly, expectations seem to be sky-high.  Whisper numbers are 8.3% higher than analysts expect, and the stock has steadily climbed by 30% over the last quarter.  Many times, unless there are blow-out earnings such as we saw in Netflix a couple of weeks ago, the stock trades lower.

 

On the other hand, short interest (39% of the float) continues to be exceptionally high (bringing the possibility of a short squeeze).  If earnings do manage to exceed expectations as I think they will, there might be a lot of short covering that will boost up the stock price.

 

Bottom line, I think the most likely scenario is that earnings will be good and the stock dips a bit.  With this in mind, here is the spread I placed this morning in three Terry’s Trades portfolios as well as my personal account:

 

Buy To Open GMCR Jun-13 52.5 calls (GMCR130622C52.5)

Sell To Open GMCR May2-13 57 calls (GMCR130510C57) for a debit of $3.70 (buying a diagonal) 

 

This spread should make a gain if the stock falls by less than 10% after the earnings announcement, stays flat, or goes up by any amount.  If the stock fluctuates only slightly, a gain as large as 50% might result.

 

Later today, Seeking Alpha will probably publish an article giving fuller details of my reasoning outlined above.  The title will be How to Play the Green Mountain Coffee Roasters Earnings Announcement.  If they don’t publish it (presumably because it is too much a pure options play), I will send you the full article later today.

 

I feel very good about this spread.

A Possible Earnings Play for This Week

Monday, April 29th, 2013

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.

 

If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!

 

Terry

 

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

 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.

Expectations Trump Results

Monday, April 22nd, 2013

The SanDisk spread I recommended to buy last week generated a 68% gain after commissions in a Terry’s Tips portfolio.  This week I have two other suggestions, one of which you must buy in the next hour or so after this is being sent out.

 

Also, if you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!

 

Terry

 

Expectations Trump Results

 

This week we got lots more support for our premise that expectations are more important than the actual results when a company announces earnings.  Not only did we score big-time with a bearish bet on SanDisk but we saw that expectations were dreadfully low for Google and we bought calendar spreads at strike prices much higher than the pre-earnings stock price and more than doubled our investment on both of them.

 

Last week I wrote a Seeking Alpha article which examined several companies that were announcing earnings this week – 3 Earnings-Related Plays For Next Week.  In this article I identified two companies with unusually low expectations  – AAPL and Caterpillar (CAT) and recommended placing bullish options spreads on them. CAT announced before the open today and they fell short on both earnings and revenue, and reduced future guidance as well (all bad news), but the stock is trading $2.40 higher as I write this.

 

We have purchased 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 also identified a company with excessively high expectations – NetFlix (NFLX).  The stock is up over $12 today in anticipation of the announcement after the close today.  An analyst upgraded them today which contributed to the rise.  With NFLX trading at $175 we are buying May 180 puts and selling Apr-4 175 puts as a diagonal spread.  It should make money if NFLX stays flat or falls by any amount.  This is the trade that you only have a couple of hours to get if you are interested.

 

I have written another article which I believe is very interesting but which hardly anyone has read so far – What Earnings Season Tells Us, So Far.  It points out that 13 of the 15 large companies with Weekly options which have reported so far have exceeded analyst expectations but 9 of them fell in price after the announcement.

Update on SanDisk (SNDK) Earnings-Related Option Play

Thursday, April 18th, 2013

Update on SanDisk (SNDK) Earnings-Related Option Play

 

Last week in a Seeking Alpha article – How To Play The First Week Of The April Earnings Season  I showed how SNDK had excessive expectations going into its earnings announcement (whisper numbers exceeded analyst expectations by 18.7%, the stock had soared over the last week and month, and implied volatility of Weekly options was 50% higher than IV of the May options.

 

With the stock trading at $57.50, I recommended buying May-13 57.5 puts and selling Apr-13 55 puts.  The natural price for this spread at Friday’s close was $1.63.  Shortly after the open on Monday in an actual portfolio conducted at Terry’s Tips, we were able to buy this spread for $1.61 in our Earnings Expectation portfolio.  We bought 15 spreads, shelling out $2452.50 including commissions.

 

The announcement exceeded earnings expectations and revenue grew 14%, but the excessive expectations drove the stock down to about $55 at the open on Thursday.  We closed out our spread shortly after the open, collecting $2.77 per spread, or $4117.50 after commissions.  Our gain for the trade amounted to $1665, or 68%.

 

It was a good week.

How to Use Expectations to Prosper With Earnings Announcements

Monday, April 15th, 2013

This week I will offer a simple spread idea that could make 50% in a couple of days next week.  It will cost about $170 per spread to put on. 

Also, if you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free! 

How to Use Expectations to Prosper With Earnings Announcements 

The earnings season started just last week.  In my last Idea of the Week I recommended buying a straddle on JPMorgan (JPM), the first big company to announce this time around.  We made that trade in an actual portfolio for Terry’s Tips subscribers and closed it out for a 15%+ gain after commissions. 

I also suggested an options strategy for JPM in a Seeking Alpha article – How To Play The JPMorgan Earnings Announcement.  In another Terry’s Tips portfolio  we placed calendar spreads as outlined in this article and closed them out for a gain of 15% after commissions even though the stock fell a little after the announcement while we were betting that it would go higher. 

A wonderful thing about options is that you can be wrong and still make profits as we did last week in our JPM trades.  Terry’s Tips subscribers who followed both portfolios made over 30% last week, more than most people make in an entire year of stock market investing. 

This week I wrote another Seeking Alpha article which checks out seven big companies which announce this week – How To Play The First Week Of The April Earnings Season.  

The major message of this article is that the price of the stock after the announcement is more dependent on pre-announcement market expectations than the actual numbers that the company releases.  If expectations are too high, the stock will fall no matter how much the company beats the analysts’ projections. 

Of the seven companies reviewed, SanDisk (SNDK) seemed to have the highest level of expectations.  Whisper numbers were 18.6% higher than analyst projections, the stock had shot up over 10% to a new high over the last week, and had moved 5% higher in the last week alone.  We believe that it is highly likely that some investors will “sell on the news” no matter how good it is, and the stock will either stay flat or fall after the announcement. 

With the stock trading about $57.70, I am buying May 57.5 puts and selling April 55 puts. Implied volatility (IV) of the May options is 37 while the April options carry an IV of 70, nearly double the May number (this means you are buying “cheap” and selling “expensive” options).  Each diagonal spread would cost $163 to place at the natural option prices at the close on Friday. 

Here is the risk profile graph for these spreads if you bought 20 of them, investing about $3400 after commissions (of course, you could buy fewer, or more, if you wished): 

SNDK Risk Profile Graph

SNDK Risk Profile Graph

This graph assumes that after the announcement, implied volatility (IV) of the May options will fall from its current 37 to 30 which is more likely in a non-announcement time period.  The graph shows that when you close the positions on Friday, April 19th, a double-digit gain could be made if the stock holds steady, and could nearly double your investment if it fell about $2 ½ after the announcement.  A profit would result no matter how far the stock might fall in value. 

We think the stock is likely to fall after the announcement because expectations are so unusually high.  If it moves higher, however, a loss could very well result.  Even in the world of options, there is no free lunch.  You need to take a risk.  We like our chances here.

Buying a Straddle on Oracle

Monday, March 25th, 2013

Last week I told you about a pre-earnings announcement on Nike.  With the stock trading around $65, we bought calendar spreads at the 62.5, 65, and 67.5 strikes for an average of $.33 each, guessing that if the stock ended up near any one of these strikes, that spread would be worth over a dollar and cover all three spreads. The stock shot up more than 11% after the announcement, and was closest to the 70 strike.  The calendar spread at that  strike was worth $1.20, so we were right on that score.  But we didn’t have any spreads at that strike, and we lost money for the day.  In future calls in companies like Nike which have a history of big moves after announcements, we will add extra out-of-the-money calls and/or puts to provide insurance against huge moves of this size. 

If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free! 

Buying a Straddle on Oracle 

On Friday, with Oracle (ORCL) trading at $32, I bought an April straddle (both a put and a call) at the 32 strike.  The straddle cost me $1.40.  The stock will have to move in either direction at least $1.40 for the intrinsic value of my straddle to be at break-even (although it will not have to move that much for the straddle to be able to be sold for a gain as there will always be some extra premium value in the options I own).

 Let’s look at how much Oracle has fluctuated each month for the past two years:  

Oracle Monthly Price Changes Last Two Years

Oracle Chart March 25 2013

Oracle Chart March 25 2013

Only two times in the last two years has Oracle failed to move at least $1.40 in one direction or another in a single month.  That means that an at-the-money straddle purchased for $1.40 at the beginning of the month could have been sold for a profit at some point during that month 22 out of 24 times. 

Many times, there would have been an opportunity to more than double your money, and while the maximum loss is theoreticlly $1.40 per spread, last week, with a week of remaining life, the 32 at-the-money straddle could have been sold for $.72 which means that if you closed out the spread with a week remaining, the worst you could do would be to recover half your initial investment.  (If the stock were at any price higher or lower than $32, the straddle would be worth more than $.72 with a week remaining). 

The big challenge with these kinds of spreads is deciding when to sell.  One way is to place a limit order when the spread reaches a certain profit level, say 50%, and take that gain whenever it comes.  In our example, that would mean placing an order to sell the straddle at $2.10.  The above table shows that in more than half the months (13 out of 24), you could have sold the straddle for at least a 50% gain.  I like those odds. 

The stock does not have to fluctuate the full $2.10 in order for the straddle to be sold at that price.  As long as there is time remaining in the options you hold, they will be worth more than the intrinsic value.  The $2.10 price might be hit if the stock only fluctuates $1.80 or so if it does it early in month. 

Another way of selling the spread is to place limit orders at slightly more than what you paid for the straddle if either the put or call reaches that price.  You might place a limit order to sell the puts at $1.43 and another order to sell the calls if they reach $1.43.  In either case, you get all your money back (plus the commission) and you have either puts or calls remaining that might be worth a great deal if the stock reverses itself and moves in the opposite direction.  The stock might have to move only about $1.20 in either direction for one of these trades to execute. 

We typically place orders to sell half of our original spreads if either the puts or calls can be sold for the original cost of the straddle.  That way we get half our money back (almost assuming that we will not lose money for the month) and if the stock continues in the direction it has started, a huge gain might be made on those remaining options, and if the stock reverses, you have twice as many of the other options that might grow in value. 

Most of our investments at Terry’s Tips involves selling premium and waiting over time for decay to set in, all the time hoping that the stock does not fluctuate too much (as that hurts calendar spreads).  It is fun to have at least one investment play that does best if the market does fluctuate, and the more the better.  Buying a straddle on Oracle gives us that opportunity, and the history of the stock’s fluctuations shows that it is a pretty good bet.

 

How to Play the Nike (NKE) Earnings Announcement

Monday, March 18th, 2013

While the earnings season is winding down, there are several companies announcing this week, and we are trading three of them.  I would like to share one of these with you, the one involving Nike. If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!

How to Play the Nike (NKE) Earnings Announcement

Calendar spreads in NKE seemed so attractive that we placed 20 Apr-Mar4 spreads last week at three different strikes for an average cost of only $.33 – if the stock ends up anywhere between $52.50 and $57 (currently about $54.50), the long side of one of those spreads with four weeks of remaining life should be worth at least $1.00, more than covering the cost of all three.  

I checked prices this morning and the three spreads could be purchased for only a little more – an average of $.35. 

NKE announces earnings on Thursday, March 21st after the close.  Expectations seem to be high – whisper numbers are $.76 vs. analysts’ projection of $.68 and the stock has gained 20% over the past three months  – high expectations typically cause disappointment with some part of the announcement and a lower stock price afterwards. 

We will want to place trades that will allow for the stock to drop in price by a greater percentage than it could go up and still make a gain on the spreads.  Here are the trades that we placed:

NKE Graph for newsletter march 2013

NKE Graph for newsletter march 2013

NKE Graph 2 for newsletter march 2013

These spreads cost a little less than $3500 to place.  The diagonal put spread is the most expensive, but will about double in value if the stock moves down to $52.5 or lower. 

Here is the risk profile graph which shows the likely gains or losses at the close of trading on Friday:

NKE Graph 2 for newsletter march 2013

Implied volatility (IV) of the Mar4-13 options (43) is nearly double that of the Apr-13 options (23) which gives us a large IV advantage with these calendar spreads.  In the above graph, we assumed that IV of the April options would fall to 20 after the announcement. 

The graph shows that if the stock falls less than 8% on Friday or goes up by less than 5%, we should make a gain with our positions.  The highest gain (about $2000 on an investment of about $3500) would come if the stock were to fall about $2 after the announcement. 

We like our chances here.   

_________________________

Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts. 

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here.   Why wait any longer to make this important investment in yourself?

Even better, you can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account at the best options broker around – thinkorswim. 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.

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).

 

More Pre-Earnings-Announcement Plays

Tuesday, February 26th, 2013

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.

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.

Making 36%

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