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Posts Tagged ‘Earnings Play’

How to Play the Google Earnings Announcement This Week

Monday, July 15th, 2013

This week the earnings season starts in earnest. One of the most interesting companies reporting is Google, mostly because expectations seem to be sky-high and our Expectations Model predicts that there is a good chance the stock will fall after the announcement is made Wednesday after the market closes.

Read to the bottom of this letter to learn how you can become a Terry’s Tips Insider for absolutely no cost.


How to Play the Google Earnings Announcement This Week

I have written a Seeking Alpha article explaining how I would play Google this week:

How To Play The Google Earnings Announcement …

In the article I suggest buying a diagonal call spread with the long side in August at the 925 strike and the short side in the Jul-13 series at the 920 strike. I placed this spread in my own account today for a debit of $3.60 (in addition to the $500 maintenance requirement per spread, the total cost is about $860 per spread).

This spread should make a gain if the stock goes up by less than $30 (my article explains why I don’t think it will go up at all) or if it falls by less than about $50 (I think this is a possibility but a remote one).

Another possible spread would be to use the same strikes but buy Jul4-13 weeklies instead of the August series. You could do this for a credit of about $.90 which would lower you total investment to about $420 per spread after commissions (the $500 maintenance requirement less the amount of the credit). This spread would make a gain no matter how far the stock might fall (even if it fell to zero) but would start losing money once it rose by about $20 (again, an unlikely event in my opinion).

Another interesting spread would be to pick the strike price (or maybe more than one) where you think the stock might end up on Friday, and buy a Jul4-13 – Jul-13 calendar spread at that strike. It should cost you only about $200 per spread. You can’t lose more than that amount on the trade, and if the stock does end up very near the strike you picked, the spread might be worth $1000 or so. The entire $200 should not really be at risk because your Jul4-13 call should always be worth more than the Jul-13 call, although if the stock ends up at a big distance away from the strike you picked, it might be difficult to get the entire $200 back.

Please read the entire Seeking Alpha article to get my full thoughts on the diagonal spread play and why I expect the stock will trade lower after the announcement.

Good luck if you do something this week in Google!

How to Play the JP Morgan and Wells Fargo Announcements Friday

Tuesday, July 9th, 2013

While we were right on the direction that Accenture (ACN) would take after the earnings announcement (down), we missed how far it would drop (it fell 15% even though it beat earnings estimates). Our diagonal credit spread using calls would have made gains no matter how far it fell but we added a higher-strike calendar “just in case we were wrong about the direction.” That spread lost big-time, and has encouraged us to stick with our model and stop second-guessing ourselves.

Today I wrote a Seeking Alpha article discussing the only two companies with weekly options who announce this week – How to Play the JP Morgan and Wells Fargo Announcements Friday

In today’s report I will have a more thorough discussion of the option strategies I suggested in that article.


How to Play the JP Morgan and Wells Fargo Announcements Friday

The major point of the Seeking Alpha article was that both companies share similar historic patterns – they consistently beat estimates and the stock either changes very little or falls once earnings are announced. This time around, expectations are quite high for both companies (whisper numbers exceed estimates, and the stock has gone up about 20% since the last earnings announcement and hit new highs this week).

In short, both stocks are in for a likely drop in price after the announcement because some part is likely to disappoint (if not earnings, then maybe revenue, margins, or guidance). We have learned from experience that high expectations consistently result in lower post-announcement prices.

We are buying diagonal call credit spreads in both companies. These spreads will make gains if the stock trades lower by any amount, and will lose if the stock moves higher by a dollar or so (but we doubt that it will move in that direction).

We suggest waiting until late in the day on Thursday to make the trades because the stock often rises in expectation of a good announcement just prior to its being made (and these diagonal spreads should go for a larger credit).

With JP Morgan (JPM) trading at about $54.50, we would buy Jul-13 55 calls and sell Jul2-13 54.5 weekly calls which expire on Friday. Here is the risk profile graph for 10 spreads which could be sold for a $.02 credit right now (but this credit should be higher on Thursday if the stock is higher then):

JPM Risk Profile Graph

JPM Risk Profile Graph

If you were to buy 10 spreads, there would be a $500 maintenance requirement (less any credit you were able to get), and that would be your maximum possible loss (which would come about if the stock moved significantly higher). It can go up about $.50 before a loss should result (assuming that IV of the July options falls from 24 to 20 after the announcement). If there is a small downturn in the stock (our belief as to the most likely outcome), the spread could return as much as 50% before commissions. It is a small bet with limited possible gains (or losses).For Wells Fargo (WFC), we are buying Jul-13 43 calls and selling Jul2-13 43.5 weekly calls expiring on Friday. At the present time, this spread could be sold for a credit of $.10, although if the stock price moves higher by Thursday it should be able to be sold for more. Here is the risk profile graph:

WFC Risk Profile Graph

WFC Risk Profile Graph

If you buy 10 diagonal spreads, there would be a $500 maintenance requirement (reduced by the $100 you collect from the credit) for a net cost of $400 (which is also your maximum loss which would come about if the stock moves significantly higher).  If the stock stays flat, you would keep the $100 credit plus the remaining value of the Jul-13 43 call.  This is not a huge investment (or return) although it looks like there is a pretty good chance of a 25% gain less commissions for the day (this graph assumes that IV of the July options will fall by 5 after the announcement – it might not fall that much and the gain would be greater if the stock is flat).

How to Play the Accenture Earnings Announcement Thursday

Tuesday, June 25th, 2013

Only two companies with weekly options announce earnings this week, Nike (NKE) and Accenture (ACN), both announcing Thursday after the close.  We could not get a good read on NKE (expectations did not seem unusually high or low so we couldn’t get a good handle on the possible direction the stock might take).  Even worse, NKE has a history of very large percentage changes after announcing, so if we were wrong on our directional guess, we could be in big trouble.ACN is a little more hopeful, and we will place a PEA Play (Pre-Earnings Announcement) on it either Wednesday or Thursday.


How to Play the Accenture Earnings Announcement Thursday

Accenture was founded in 1995 and is based in Dublin, Ireland.  It provides management consulting, technology, and business process outsourcing services worldwide.   Here are the numbers for ICN for the last four announcements:

ACN Whisper Numbers

ACN Whisper Numbers

The company met or beat estimates every quarter but once, and that time the stock fell 3.1% after the announcement. The stock moved higher from about $75 after the last quarterly announcement to a new high of $84.23 four weeks ago but has fallen back to about $79.80 since that time, suggesting that expectations have receded a bit.  RSI is at 44, in a neutral state.Insiders sold 16.8% of their holdings (388,854) over the last six months, a little on the high side, while institutions added 566,683 over the last quarter, a bullish signal (although on a base of 650 million shares outstanding, these numbers are not terribly significant).

The company sports a forward p/e of 17.11 which does not seem too high considering that it has maintained a steady growth of revenues and earnings for many years.  The stock has doubled in value over the past 2 ½ years.  It pays a 2% dividend which should help ward off a very large drop in the stock price.

Bottom line, in spite of whisper numbers exceeding estimates by a fair margin, expectations do not seem terribly high, especially with the recent drop in the stock price.  The company has been quite consistent in beating estimates, so it seems unlikely that there should be a big drop in the stock price after the announcement.  On the other hand, with the whisper numbers higher than estimates, there seems to be only a small chance of a big run-up in the stock.

This is the risk profile graph for two diagonal spreads (10 contracts eac), buying July 82.5 calls and selling Jun4-13 80 calls for a credit ($.40 as I write this) and buying July 75 puts and selling Jun4-13 77.5  puts for a small debit ($.05 as I write this), incurring a $2500 maintenance requirement,  assuming that IV of the August options falls by 3 after the announcement:

ACN Risk Profile Graph

ACN Risk Profile Graph

It will be interesting to see how this sugars out at the close on Friday when we will most likely close out all the positions.

How to Make a Portfolio of Calendar Spreads Either Bearish or Bullish

Monday, June 17th, 2013

Last week our string of 12 consecutive winning PEA Plays (Pre-Earnings Announcement) was broken, not because our model guessed wrong on where the stock (LULU) would go after the announcement (down, as it did), but because the CEO announced her retirement and the stock fell almost 20% on that news (the company actually exceeded estimates on earnings, revenues, and guidance but the retirement news overshadowed that good news).  Our option positions were set up to handle a 7% drop and still make a gain, but we could not handle a 20% drop.

Interestingly, our loss came about not from our basic diagonal spread (where we would have made money in spite of the huge drop) but from the insurance calendar spreads we placed “just in case we were wrong” about the direction the stock would take.  If we had had more faith in our model, we would not have made the insurance purchase, and we would not have suffered a loss.

Our loss on LULU was slightly greater than the average gain we made on the 12 previous PEA Plays, so while it was an unpleasant setback, it was not devastating.


How to Make a Portfolio of Calendar Spreads Either Bearish or Bullish: 

At Terry’s Tips, we use an options strategy that consists of owning calendar (aka time) spreads at many different strike prices, both above and below the stock price. A calendar spread is created when you buy an option with a longer lifespan than the short option that you sell against your long position with both options at the same strike price. We also use diagonal spreads which are similar to calendar spreads (except that the strike prices of the long and short sides are different). 

We typically start out each week or month with a slightly bullish posture since the market has historically moved higher more times than it has fallen.  In option terms, this is called being positive net delta.  Starting in May and extending through August, we usually start out with a slightly bearish posture (negative net delta) in deference to the “sell in May” adage. 

Any calendar spread makes its maximum gain if the stock ends up on expiration day exactly at the strike price of the calendar spread.  As the market moves either up or down, adding new spreads at different strikes is essentially placing a new bet at the new strike price.  In other words, you hope the market will move toward that strike.

If the market moves higher, we add new calendar spreads at a strike which is higher than the stock price (and vice versa if the market moves lower).  New spreads at strikes higher than the stock price are bullish bets and new spreads at strikes below the stock price are bearish bets.

It does not make any difference whether puts or calls are used for a calendar spread – the risk profile is identical for both.  The key variable for calendar spreads is the strike price rather than whether puts or calls.  In spite of that truth, we prefer to use puts when buying calendar spreads at strikes below the stock price and calls when buying calendar spreads at strikes above the stock price because it is easier to trade out of out-of-the-money options when the short options expire.

If the market moves higher when we are positive net delta, we should make gains because of our positive delta condition (in addition to decay gains that should take place regardless of what the market does).  If the market moves lower when we are positive net delta, we would lose portfolio value because of the bullish delta condition, but some or all of these losses would be offset by the daily gains we enjoy from theta (the net daily decay of all the options).

Another variable affects calendar spread portfolio values.  Option prices (VIX) may rise or fall in general.  VIX typically falls with a rising market and moves higher when the market tanks.  While not as important as the net delta value, lower VIX levels tend to depress calendar spread portfolio values (and rising VIX levels tend to improve calendar spread portfolio values).  

Once again, trading options is more complicated than trading stock, but can be considerably more interesting, challenging, and ultimately profitable than the simple purchase of stock or mutual funds.

Update On LULU Trades

Friday, June 7th, 2013

Yesterday I sent out suggested trades for LULU’s Monday earnings announcement.  The stock has rallied over $2.50 since then, and we have raised our strike prices by 2 ½ and placed the following trades today:


June 7, 2013 Trade Alert –  PEA Picker  Portfolio – limit orders

LULU announces earnings after the close on Monday and we will get these orders in today, committing a little over half our money:


BTO (buy to open) 10 LULU Jul-13 82.5 calls (LULU130720C82.5)

STO (sell to open) 10 LULU Jun2-13 80 calls (LULU130607C80) for a debit limit of $.25  (buying a diagonal)


BTO 5 LULU Jul-13 85 calls (LULU130720C85)

STO 5 LULU Jun2-13 85 calls (LULU130607C85) for a debit limit of $1.37  (buying a calendar)


Happy trading.





How to Play the Lululemon Athletica Earnings Announcement

Thursday, June 6th, 2013

This article was submitted to Seeking Alpha but was declined because it focused on options.  I thought you might like to see it.

This quarter’s earnings season is winding down.  Only one company with weekly options available, Lululemon Athletica (LULU) is due to report next week.  (I restrict my analysis to companies with weekly options because they are the most actively-traded and popular, and I often employ the weekly options in my trading.)  LULU reports on Monday, June 10 after the closing bell.

LULU is a high-end retailer of fitness apparel including fitness pants, shorts, tops, and jackets for healthy lifestyle activities, such as yoga, running, and general fitness. Based in Vancouver, British Columbia, LULU has 135 stores in the United States and 51 stores in Canada, and also has extensive wholesale business through health and fitness clubs.

Not only are its clothes high-end, so is its p/e ratio, 42.47, which compares to Nike’s (NKE) 24.11.  This lofty evaluation is the likely reason for the large number of shares sold short (19.8% of the float).

Looking forward to next week’s earnings announcement, let’s check out what has happened over the past four quarters, with the stock price change from the close on the day before the announcement until the closing price on Friday (when the weekly options expire):   

LULU Earnings Chart

LULU Earnings Chart

LULU has not done very well after earnings announcements considering they beat estimates every time.  In half the quarters the stock fell after they topped estimates. The stock has tended to move considerably after an announcement (an average of 7%). Next week’s option prices are priced for a 7% move, exactly the average change for the last four quarters.

Over the last several months, I have been testing the proposition that the level of expectations prior to an earnings announcement is a better indicator of what the stock price will do than the actual earnings themselves. I call it the Expectation Model.   Basically, I examine recent stock price activity, estimates vs. whisper numbers, past post-earnings price changes vs. results, current RSI levels, and come up with a measure of whether expectations are unusually high or low. If expectations are usually high, there is an excellent chance that the stock will be flat or fall after the announcement, regardless of how much the company might surpass estimates, and conversely, the stock is more likely to move higher when expectations are low, even if estimates are merely met.  (Unusually low expectations are generally less predictive of higher post-announcement prices, however – unusually high expectations more reliably predict lower prices after the announcement). I have had some serious success with this model, including 12 consecutive winning pre-earnings calls (average gain about 18%) without a loss – see results and update. Over half of the earnings plays were published in Seeking Alpha articles published before the announcement – see some examples here and here.

A bullish case for the company cited getting its yoga pant line back after recalling it for being too transparent – Lululemon Poised To Pop After Ironing Out Pants Issue. A more balanced analysis was made by Bill Maurer –  Will Lululemon Decline After Earnings?  I strongly encourage you to read this article as he reported just about exactly what I would have said so there is no reason to repeat it all here.

The only thing I would add to Bill Maurer’s article is my concern of the level of recent insider and institutional sales of stock.  While Yahoo reports that insiders sold 579,758 (4.2% of their holdings) over the past six months, if you add up the individual sales reported that number becomes more than double that amount.  Over the last quarter, institutions disposed of over 7 million shares (4.9%) of their holdings.

So how does LULU stack up with the Expectation Model?  Bottom line, expectations seems to be a little high leading up to next week’s announcement.  The stock has had a huge run-up recently, rising about 25% over the past 10 weeks and hitting a new high of $82.48 last week before backing off about $4 since then.  Whisper numbers are higher ($.32) than estimates ($.30). Recent institutional sales or purchases are part of the model and have been a fairly reliable indicator as to how the price might move after the announcement.  We can expect that a great deal of research and analysis went into their decision (in this case, to sell shares) and it is usually a good idea to follow along with them rather than guess they are wrong.

High expectations, a record of lower stock prices after earnings, and what I believe is a currently-expensive stock price, all lead me to believe that there is an excellent chance that LULU will trade lower next week and that anyone who is thinking of buying shares should wait until after the announcement and most likely get a better price at that time.  This is just what I said about Costco (COST) two weeks ago (a company I love and am long), and even though it bested estimates, it is trading about $5 lower after announcing.

I don’t feel as strongly that LULU will drop after the announcement as I did with COST, however (mostly due to the stock falling $4 in the last week), so I will hedge my bet.  With LULU trading at $79, I will buy 10 July-13 80 calls and sell 10 Jun2-13 78.5 calls (incurring a maintenance requirement of $2500) for about even money, and buy 5 July-13 – Jun2-13 82.5 call calendar spreads for about $1.25 (just in case I am wrong and the stock moves higher).  My total investment will be about $3200.

Here is the risk profile graph for those positions assuming that IV of the July option will fall from 40 to 30 after the announcement:

LULU Risk Profile Graph

LULU Risk Profile Graph

These positions could make an average gain of about 20% if the stock does not fluctuate too much.  It looks like a gain of some sort should come about if the stock fluctuates by less than 5% on the upside or about 7% on the downside.  This is an investment you should only make with money that you can truly afford to lose.  I plan to do it, and expect it to be my 13th consecutive winning earnings trade.

Updates on Costco and Joy Global Earnings Plays

Monday, June 3rd, 2013

Last week I wrote two Seeking Alpha articles on earnings plays – How To Play The Costco Earnings Announcement and How To Play Joy Global’s Earnings Announcement.  I expected that Costco would fall after earnings because expectations were unusually high and that JOY would move higher because expectations were quite low.

I was right on with the COST call and our positions gained 16.6% after commissions for the week.  JOY fell marginally, less than $.50 and we gained 7.8%.

Update on the Costco trade (submitted as a comment after the Costco article). Today before the open, Costco announced earnings of $1.04 which beat estimates of $1.02 but fell short of the $1.06 whisper number. The stock is now trading just under $113 compared to just under $115 when I wrote this article so any potential buyer of the stock would have done well to heed my advice and wait until after the announcement to buy shares (Note: a day later fell to below $110).

The diagonal option spread that I suggested was sold in our Terry’s Tips portfolio for a credit of $.84. That meant for anyone buying 5 spreads, your investment would have been the $2500 maintenance requirement less $420 received from the sale, or $2080. Today we sold the spread for a debit of $.10, making $.74 per spread. After paying commissions of $25, the net gain on 5 spreads was $345, or 16.6% on the investment. This was the 11th consecutive successful earnings trade we have made using our Expectation Model.

Note: In the actual Terry’s Tips portfolio where the Costco trade was made, we also placed a calendar spread to reduce our risk (in case we were wrong about Costco falling after the announcement).  This spread lost money and reduced our gain to 9.6% after commissions.

In JOY there were 4 July-13 – May5-13 calendar spreads. In our actual account at thinkorswim, here are the numbers for what we paid for these spreads and what we sold them for: 52.5 strike (cost $1.35 sold for $1.20), 55 strike (cost $1.55 sold for $2.38), 57.5 strike (cost $1.50 sold for $1.61), and 60 strike (cost $1.19 sold for $1.00). We lost money on 2 spreads but gained on 2 others, and enjoyed one big gain. The total cost of our investment was $2236 and our net gain after paying $65 in commissions was $175, or 7.8% on our investment.

While this was quite a bit lower than the returns we made on the earlier 11 investments that resulted in gains averaging about 19% (without a single loss), most people would be happy with 7.8% for a single week after commissions. 

These two profitable earnings trades made it 12 consecutive gainers for this portfolio.
The odds of making 12 successful profitable trades without a single loss is comparable to flipping a coin and getting heads 12 times in a row. The odds of that happening are one out of 4096 times. Either I have been incredibly lucky or maybe there is some merit in the Expectations Model I have developed. The future will tell. 

We are not making any earnings-related trades this week because only one company we are following (they must have weekly options and be trading over $20) reports this week, and our expectations model could not determine whether expectations were unusually high or low.

Wow – It’s Now 10 Consecutive Profitable Earnings Plays Without a Loss

Tuesday, May 28th, 2013

Another week has gone by and we invested in two more PEA (Pre-Earnings Announcement) Plays using the Expectation Model I have been talking about for the past couple of months.

You would have had to read about these two trades in Seeking Alpha articles I wrote (sign up as a follower and you will be notified whenever I write one of these articles).  Here they are if you want to check them out – How To Play The Earnings Announcement and How To Play The Abercrombie & Fitch May Earnings Announcement.

The option spreads we placed in both and Abercrombie made gains, and extended our winning streak to ten consecutive plays without a single loss.  Today I would like to explain how we did it, and offer two more PEA Plays for this week.

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


Wow – It’s Now 10 Consecutive Profitable Earnings Plays Without a Loss

First, here is a link to the exact trades we made on the above two companies to extend our string from 8 to 10 consecutive winners – update.

This week’s trades have been submitted to Seeking Alpha – How To Play The Costco Earnings Announcement and How To Play Joy Global’s Earnings Announcement.

If you are interested in trying either of these plays, you need to hurry.  The trades must be placed before the market close tomorrow, Wednesday, May 29th.

I am eager to see the results on Friday, hopefully with two additional plays added to our winning streak.

Next week, sadly, there are no companies with weekly options that are reporting, so we will have to move on to other strategies for one week.

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 Alert –  PEA 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 Alert –  PEA 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: (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 Alert –  PEA Picker  Portfolio – LIMIT ORDERS

I wrote a Seeking Alpha article about this play if you are interested – How To Play The 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 Alert –  PEA 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 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.

Making 36%

Making 36% — A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

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Success Stories

I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

~ John Collins