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Posts Tagged ‘Earnings Play’

Eight Consecutive Successful Earnings Plays and What We Learned

Friday, May 17th, 2013

Note: There is a lot of valuable information in this report for anyone who trades stock options.  It will take you about 15 minutes to read, but that investment in your time could be worth thousands of dollars to you down the line.  I hope you will read it thoroughly all the way to the end.

On April’s Fools Day in 2013, we opened a new $5000 portfolio at Terry’s Tips.  We thought that might be a lucky day to start.  For several months we had been studying what happens just before and after a company announces their quarterly earnings, and this portfolio was designed to put our observations to work.

The biggest thing we discovered in our analysis was that the post-announcement change in the stock price was determined more by market expectations prior to the announcement than the actual earnings themselves.  If you have played in the stock market for any length of time, you surely have lived through an earnings announcement when your favorite company exceeded estimates on all scores, and the stock fell on the news.  That really hurts, and I’m sure we all have felt it.

We have concluded that it is all due to what the market was expecting vs. its experience of the actual earnings.

Most of the time, we measured expectations by what the stock had done in the weeks leading up to the announcement and the difference between what analysts predicted earnings would be and the whisper numbers (we also check out RSI numbers to see if the stock is particularly over-sold or over-bought, and recent company performance at earnings time related to results vs. estimates). 

When the stock has had a big run-up before the announcement and whisper numbers were greater than analyst expectations, we concluded that expectations were uncomfortably high, and the least disappointment in the announcement (concerning earnings, revenues, margins, or guidance) might result in the stock trading lower even if the company surpassed earnings by a comfortable margin.

We called it the PEA Picker portfolio (PEA stands for Pre-Earnings Announcement).  We restricted the companies that we would consider to those which traded Weeklys approximately 160).  We eliminated companies trading for less than $20 because option prices were typically not attractive enough for our purposes. We ended up with about 100 companies which are the most actively-traded and have the most liquid option markets (i.e., small bid – ask spreads and the assurance that decent spread prices could be executed). 

Even more important, we could trade out of them on the Friday following the announcement, just a few days after placing our trades.  This eliminated being concerned about the long-run prospects for the company and put us in cash at the end of the week so we could invest in another company in the following week.  We like near-instant gratification on our trades, bad or good, and we like to sleep over the weekend with no positions in place (most of the time).

In addition to checking recent stock price action and whisper numbers, we looked carefully at the last four earnings reports to see what happened, and to the most recent RSI numbers to learn if the stock were unusually over-bought or over-sold.  Some companies consistently exceeded expectations and their stock fell after the announcement while others merely met expectations and the stock moved higher. 

Many times we were able to detect patterns that helped us decide which option spreads we would use.  One pattern was that big moves after announcements tended to be reversed at the next announcement (or more often, big moves were rarely followed by big moves in the same direction at the next announcement).

The day after the PEA Picker portfolio was set up, we issued the following Trade Alert.  By the way, this portfolio is carried out in an actual TD Ameritrade/thinkorswim portfolio and all commissions are included at the special rate offered to Terry’s Tips Insiders.  All of the Trade Alerts in this report are actual emails that were sent to Terry’s Tips Insiders and to thinkorswim so they could execute trades through Auto-Trade.  Our account is set up through Auto-Trade so every trade reported here was exactly duplicated in the accounts of all our subscribers who set up through Auto-Trade at thinkorswim.

This first trade involved buying a straddle which we bought before the Weeklys which expired on the Friday after the announcement were available.  This not the usual way we set up PEA Plays but we do it sometimes, obviously.

We had decided that expectations were unusually low and the stock would head higher after the announcement, but the first trade was neutral (it would make money if the stock headed either way, just as long as it moved).

April 2, 2013  Trade Alert –  PEA Picker  Portfolio

J.P. Morgan (JPM) announces earnings next week and the Weeklys that become available on Thursday will be the options with the escalated implied volatility (IV).  We will establish some long positions before that time.  The stock is trading very close to $48 right now so the straddle price is at its lowest.  The straddle might gain for two reasons – first, leading up to an announcement the stock quite often moves (usually higher), and second, implied volatility (IV) of the monthly options usually moves higher once the Weeklys become available:

BTO (Buy To Open) 20 JPM Apr-13 48 calls (JPM130420C48)
BTO 20 JPM Apr-13 48 puts (JPM130420P48) for a debit of $1.88  (buying a straddle) 

Two days later, we issued the following:

April 4, 2013  Trade Alert #2 –  PEA Picker  Portfolio

There are many reasons to believe that the stock is headed higher after earnings and we are currently negative net delta.  This trade will make us long:

STO (Sell To Open) 15 JPM Apr2-13 47 puts (JPM130420P47) for $.58

We held these positions (which cost us a net $2041) until shortly before earnings were to be announced after the close on April 10.  The stock had moved about two dollars higher as we had anticipated.  We issued the following:

April 10, 2013  Trade Alert –  PEA Picker  Portfolio

The stock moved up almost $2 and IV also moved up. We have a nice gain here so we might as well take it rather than waiting for more (or maybe less) once earnings are reported:

BTC 15 JPM APR2-13 47 puts (JPM130412P47)
STC 15 JPM Apr-13 48 puts (JPM130420P48) for a credit of $.25  (selling a diagonal)

STC 5 JPM Apr-13 48 puts (JPM130420P48) for $.30

STC 20 JPM Apr-13 48 calls (JPM130420C48) for $1.74

 
This first PEA Play was a little complicated (future ones will make more sense, I promise).  You can see that we sold the original straddle (which had cost us $1.88) for a total of $2.04 ($1.74 + $.30).  It is not so clear to see that the 15 Apr2-13 47 puts we had sold for $.58 were bought back for only $.05 (this was where most of our gain was).  After commissions, we made a profit of $789 on our $2061 investment, or about 38% of the money we had invested.  The portfolio as a whole had gained only 15.8% because we had invested only about 40% of the cash at our disposal.
The next week featured the Google (GOOG) announcement. We noticed that the GOOG options were expecting a move of 12.3% yet the average post-announcement move had historically been only 6.7%.  (You can calculate the percentage change that the options are predicting by adding up the time premium of the at-the-money Weekly put and call and dividing that total by the stock price.)  While we would have liked to sell the straddle short, that is not possible in an IRA account, and we do not make any trades for our subscribers which cannot be executed in an IRA.
Our choice was to buy diagonal spreads at strikes both comfortably above and below the stock price.  We issued the following:

April 15, 2013  Trade Alert –  PEA Picker  Portfolio
This is a small bet that Google will not deviate by more than $40 from its present level of $790 after this week’s announcement:

BTO 1 GOOG May-13 785 put (GOOG130518P785)
STO 1 GOOG Apr-13 765 put (GOOG130420P765) for a debit of $13.51  (buying a diagonal)

BTO 1 GOOG May-13 820 call (GOOG130518C820)
STO 1 GOOG Apr-13 830 call (GOOG130429C830) for a debit of $8.02  (buying a diagonal)

The total amount invested here was $2158 including commissions.

Again, these trades are a little unlike our usual PEA Plays, but the key point is that the stock would have to fall by $25 before the short 765 puts would have any value.  If the stock fell by that much, or more, the May-13 785 put would be worth at least $2000 more than the short put value (and there would still be some value in the May-13 820 call), so there would be a gain no matter how far the stock might fall.

If the stock were to move $40 higher, the 830 call would have some value, but the May-13 820 call will always be worth at least $1000 more than the 830 short call (and actually, quite a bit more because the option would be very close to the money and there would be a full month of time remaining in that option).  In short, it appeared that a gain would come no matter how high the stock might go.  However, while these spreads gave us excellent protection if there was a large move in either direction, if the stock didn’t move much there was the possibility of a loss.  We corrected that three days later when we issued the following Trade Alert:

April 18, 2013  Trade Alert –  PEA Picker  Portfolio

The stock has fallen more than $20 since we placed the first spreads.  This is an indication that expectations have dwindled, and the stock might move higher.  These trades will give us a little more upside protection in case it rallies and also protects the mid-range from the extremes of the diagonal spreads we placed earlier:

BTO 1 GOOG May-13 780 call (GOOG130518C780)
STO 1 GOOG Apr-13 780 call (GOOG130429C780) for a debit of $4.60  (buying a calendar)

BTO 1 GOOG May-13 790 call (GOOG130518C790)
STO 1 GOOG Apr-13 790 call (GOOG130429C790) for a debit of $4.75  (buying a calendar)

The stock ended up trading between $780 and $790, just where these calendar spreads would do best.  We sold them for $11.52 and $11.80, well more than doubling our money on those spreads.  We lost a little money on the original diagonal spreads, closing out the puts for $15.92 and the calls for $3.90 (for a total of $19.82 compared to our cost of $21.53).

We lost $176 on the diagonal spreads and gained $1392 on the calendar spreads, making the total gain after commissions for the week a healthy $1216 on an investment of $3,098, or 39%.  We plan to make similar investments with Google options in July when the next earnings announcement is scheduled.

Next up was the eBay earnings announcement.  This occurred during the same week as the Google play, and we had spare cash we could put to use:

April 16, 2013  Trade Alert –  PEA Picker  Portfolio

eBay is flirting with a new high and whisper numbers exceed estimates.  This level of expectation usually results in a flat or lower stock price after the announcement, and this spread should make gains if the stock rises moderately or falls by any amount:

BTO 10 EBAY May-13 60 calls (EBAY130518C60)
STO 10 EBAY Apr-13 57.5 calls (EBAY130420C57.5) for a credit of $.16  (buying a diagonal)

This spread required a maintenance requirement of $2500 (less the $160 received).

The stock did manage to fall, and by quite a bit, the Apr-13 57.5 calls expired worthless and we were only able to sell the May-13 60 calls for $.07 ($70) so we managed to make a small gain of $230 less $75 commissions on our eBay play (7%).

The portfolio value had soared to $7,187 in its first two weeks of trading.  We withdrew $2000 from the portfolio so that Terry’s Tips subscribers could follow PEA Picker trades for about $5000 (either through Auto-Trade at thinkorswim where they don’t have to place any trades themselves, or on their own if they preferred another broker).

Next up was Apple (trading at about $405):

April 22, 2013  Trade Alert –  PEA Picker  Portfolio – limit orders

Expectations for Apple seem to be unusually low and when earnings are announced after the close tomorrow there is a good chance that it will trade higher:

BTO 5 AAPL May-13 410 calls (AAPL130518C410)
STO 5 AAPL Apr4-13 410 calls (AAPL130426C410) for a debit limit of $3.85  (buying a calendar)

BTO 5 AAPL May-13 420 calls (AAPL130518C410)
STO 5 AAPL Apr4-13 420 calls (AAPL130426C410) for a debit limit of $3.65  (buying a calendar) 

The stock did move higher and the next day we issued the following:

April 23, 2013  Trade Alert –  PEA Picker  Portfolio

The stock has moved up $15 since we bought our spreads.  We should use our remaining cash to add on another calendar at a higher strike:

BTO 4 AAPL May-13 430 calls (AAPL130518C430)
STO 4 AAPL Apr4-13 430 calls (AAPL130426C430) for a debit limit of $3.16  (buying a calendar) 

The stock closed at $417.20 on Friday.  We sold the 430 spread for $3.14 (incurring a loss of $28 after commissions), the 420 spread for $6.86 and the 410 spread for $4.66, both at nice gains totaling $1960 after commissions.  Net gain for the trades was $1982 on an investment of $5049, or 39%. 

The portfolio value had climbed to $7062 and it was time to withdraw another $2000 from the portfolio to allow new Terry’s Tips subscribers to follow it for about the starting value of $5000.

Next up was Storage Technology (STX):

May 1, 2013  Trade Alert –  PEA Picker  Portfolio

There are a lot of reasons to believe that Seagate (STX) will move higher after today’s announcement following the close.  The company has exceeded expectations every quarter for the last year and sells at a trailing p/e of only 6.4 in spite of consistent growth and a 4.2% dividend.  The company is aggressively buying back shares – in the last six months of 2012, it reduced the outstanding shares by 9.5% and has plans to continue buying back shares.  Whisper numbers are higher than analyst expectations ($1.31 vs. $1.19) but the shares are trading lower than they were three weeks ago which suggests that expectations are not unusually high.  These positions should make gains if the stock falls only a small amount or goes up by any reasonable amount:

BTO 4 STX Jun-13 37 calls (STX130622C37)
STO 4 STX May1-13 36.5 calls (STX130503C36.5) for a debit of $.44  (buying a diagonal)

BTO 4 STX Jun-13 37 calls (STX130622C37) for $1.66

BTO 4 STX Jun-13 37 calls (STX130622C37)
STO 4 STX May1-13 37 calls (STX130503C37) for a debit of $.68  (buying a calendar)
 
BTO 8 STX Jun-13 38 calls (STX130622C38)
STO 8 STX May1-13 38 calls (STX130503C38) for a debit of $.66  (buying a calendar)

BTO 8 STX Jun-13 34 puts (STX130622P34)
STO 8 STX May1-13 34 puts (STX130503P34) for a debit of $.78  (buying a calendar)

The next day the stock moved up over a dollar and we wanted to get a little longer so we placed these trades:

May 2, 2013  Trade Alert –  PEA Picker  Portfolio – limit orders

This trade will pick up a little premium and make us neutral net delta:

BTC 4 STX May1-13 36.5 calls (STX130503C36.5)
STO 4 STX May1-13 39.5 calls (STX130503C39.5) for a debit limit of $2.45  (buying a vertical)

We will take these spreads off:

BTC 4 STX May1-13 37 calls (STX130503C37)
STC 4 STX Jun-13 37 calls (STX130622C37) for a credit limit of $.50  (selling a calendar)

BTC 8 STX May1-13 34 puts (STX130503P34) for a limit of $.01 (no commission)

STC 8 STX Jun-13 34 puts (STX130622P34) for a limit of $.31

Note: thinkorswim does not charge a commission when you buy back short options for $.05 or less.

These were our closing transactions:

May 3, 2013  Trade Alert –  PEA Picker  Portfolio – limit orders

We need to close these out today:

BTC 8 STX May1-13 38 calls (STX130503C38)
STC 8 STX Jun-13 38 calls (STX130622C38) for a credit limit of $.37  (selling a calendar)

BTC 4 STX May1-13 39.5 calls (STX130503C39.5)
STC 4 STX Jun-13 37 calls (STX130622C37) for a credit limit of $2.68  (selling a diagonal)

STC 4 STX Jun-13 37 calls (STX130622C37) for $4.45

The stock had shot up 11% after announcing earnings.  While we correctly guessed the direction of the change, we didn’t quite expect it would be that large.  We lost money on all the spreads we had placed, but the four extra uncovered Jun-13 37 calls rose enough to cover all the losses.  It was our worst week so far.  We gained only $161 which worked out to be 6.4% on our investment and 3.2% on the portfolio value.

Next up was Green Mountain Coffee Roasters (GMCR), a company I have followed since its founding since I live in Vermont and have played tennis regularly with the founder (now ex-chairman) of the company (no, he never gives me any tips, darn it).  I have made a great deal of money betting on the company this year (while it has risen nearly four-fold from its low).  I wrote a Seeking Alpha article outlining why I believed that the company would exceed estimates on earnings but the stock might be flat or fall a little after the announcement – How To Play The Green Mountain Coffee Roaster…

This is the trade I recommended in that article:

May 6, 2013  Trade Alert –  PEA Picker  Portfolio

As we indicated in the Saturday Report, we will make this trade:

BTO 12 GMCR Jun-13 52.5 calls (GMCR130622C52.5)
STO 12 GMCR May2-13 57 calls (GMCR130510C57) for a debit of $3.78 (buying a diagonal) 

Two days later, my prognosis of the earnings was right on the money, but the company unexpectedly announced a new five-year deal with Starbucks which removed much of the uncertainty about the company.  The stock soared by 25%!

If this announcement had not been made I feel certain that our spread would have gained about 50%, but with such a huge gain in the stock, we had to settle for less:

May 9, 2013  Trade Alert –  PEA Picker  Portfolio – limit order

The stock has gone up so far that we can expect to collect little more than the intrinsic value of this spread:

BTC 12 GMCR May2-13 57 calls (GMCR130510C57)
STC 12 GMCR Jun-13 52.5 calls (GMCR130622C52.5) for a credit limit of $4.53  (selling a diagonal)

We “only” made 18.5% after commissions for the trades.  The wonderful thing about options is that you can be wrong and still make a gain much of the time, as we managed to do this time around.

The PEA Picker portfolio was now all in cash and was worth $6,065.  It was time to withdraw another $1000.  Subscribers who followed our trades or participated in Auto-Trade now had all $5000 they originally invested back, and the portfolio was still worth over $5000, It had only been 38 days since our first trade.

Next week we made two PEA Plays, one on Deere & Company and the other on Sina Corporation (SINA).  I wrote Seeking Alpha articles in advance of both plays –How To Play The Deere & Company Earnings Anno… and How To Play The Sina Corporation Earnings Ann…

May 14, 2013  Trade Alert –  PEA Picker  Portfolio – limit orders

We will invest about half our cash in this play as described in the Saturday Report:

BTO 8 DE Jun-13 95 puts (DE130622P95)
STO 8 DE May-13 92.5 puts (DE130518P92.5) for a debit limit of $2.35  (buying a diagonal)

BTO 4 DE Jun-13 90 puts (DE130622P90)
STO 4 DE May-13 90 puts (DE130518P90) for a debit limit of $.93  (buying a calendar)

We thought expectations were running high (whisper numbers well above analyst expectations and the stock had traded higher going into the announcement) so we were betting on a flat or down market after the announcement.  In addition, for the prior four quarters, Deere had traded lower (by about 4%) after earnings, even though they exceeded estimates most of the time.

We were not disappointed.  Even though the company announced earnings that were above estimates, their guidance was tepid.  The stock fell about $4 after the announcement.  We took off our diagonal spread the same day:

May 15, 2013  Trade Alert –  PEA Picker  Portfolio – LIMIT ORDER

We will take off this spread if can get this price:

BTC 8 DE May-13 92.5 puts (DE130518P92.5)
STC 8 DE Jun-13 95 puts (DE130622P95) for a credit limit of $2.72  (selling a diagonal)

We closed out the calendar spread on Friday, selling it for $1.42.  Our gain on the trades was $176 for each spread after commissions, or $352 total on an investment of $2282, or 15%.

In the same week we made a second PEA Play, this one on Sina:
 
May 14, 2013  Trade Alert  #2 –  PEA Picker  Portfolio – limit orders

We will invest about half our cash in this play:

BTO 7 SINA Jun-13 55 puts (SINA130622P55)
STO 7 SINA May-13 55 puts (SINA130518P55) for a debit limit of $1.17  (buying a calendar)

BTO 7 SINA Jun-13 57.5 puts (SINA130622P57.5)
STO 7 SINA May-13 57.5 puts (SINA130518P57.5) for a debit limit of $1.28  (buying a calendar)

BTO 7 SINA Jun-13 60 calls (SINA130622C60)
STO 7 SINA May-13 60 calls (SINA130518C60) for a debit limit of $1.30  (buying a calendar)

On the day before earnings were announced, we added another spread:

May 16, 2013  Trade Alert –  PEA Picker  Portfolio – limit order

If Sina stock rallies more than 5% we will lose money on our spreads.  This trade will expand our upside protection a little and still give us coverage for almost a 10% drop on the downside:

BTO 4 SINA Jun-13 57.5 puts (SINA130622P57.5)
STO 4 SINA May-13 60 puts (SINA130518P60) for a debit of $.10  (buying a diagonal)

We had expected Sina to fall after the earnings announcement because expectations were so high, but we left ourselves with a little room for the stock to move higher in case we were wrong.  The extra trade ended up being a good one because the stock opened up almost $2 higher but then fell back over a dollar mid-day.  We sold the 4 diagonal put spread for $.93, making $352 after commissions.  The 55 put calendar spread was sold for a loss ($.70), the 57.5 put calendar spread for a small gain ($1.35), and the 60 call calendar was sold for a nice gain ($2.05).  After commissions, the Sina options were closed out for a $525 gain, or 19% on our $2727 investment (we had a $1250 maintenance requirement for one day because of the put diagonal, but since we had closed out the Deere positions we had plenty of spare cash in the account).

So there we are.  Eight consecutive profitable option spreads on earnings announcements.  The original $5000 investment had been entirely withdrawn in cash and the account was worth $5862 and sitting in cash awaiting the next week’s trades.

Here are the net results:
JPM  38%
GOOG  39%
EBAY   7%
AAPL  39%
STX   6%
GMCR 18%
DE  15%
SINA  19%

The average gain for the eight successful plays was 22.6%.  Most of the time we only put about half our money at risk so the portfolio increased in value by less than 8 x 22.6%.

What We Have Learned:   We have identified the following characteristics of earnings-announcement-related price action based on our experience over the past several months:

1. It is possible to construct a combination of option spreads which creates a profit if the stock moves less than 10% in one direction or 5% in the other.  Most of the time, the level of pre-announcement expectation determines the direction you want to establish the 10% coverage.

2. It is possible to create unlimited coverage in one direction or the other with diagonal spreads but the potential gains are diminished.

3. Big (over 10%) price moves are almost always in the opposite direction of these last 10% earnings-related move.

4. Downside 10% moves are about twice as likely as upside 10% moves.

5. Big downside price moves are much more likely when expectations are high (some small part of the announcement often disappoints).  High expectations can be measured by a strong upward move in the stock price in the month or two prior to the announcement, a high RSI, and whisper numbers exceeding analyst expectations – all three numbers should be checked prior to making PEA Play).  Low expectations (and a possible 10%+ upward post-earnings move) have the opposite numbers.

6. When risk profile graphs are created prior to making a PEA Play, it is important to change the Implied Volatility (IV) of the long options to account for the expected implosion of all option prices after the announcement has been made.  Check back to see what IV of the one-month options fell to after the last earnings announcement as a guide. If the month of the long options is greater than three months more than the short-term options which are being sold (usually Weeklys), IV will not fall as much as shorter-term long options (because a second earnings-announcement day will occur before they expire).

7. It is usually possible to create a risk profile graph which shows a break-even range which extends about 10% in one direction (usually on the downside) and 5% in the other (usually the upside) by selecting the strike prices of the calendar spreads.

8. When selecting the best month for the long side of the calendar spreads, check out the bid-ask ranges of the options to learn if decent executions are likely.  The further out you go, the more conservative your positions will be (more of the option’s value is due to its long life than its IV) but the greater the bid-ask range might be.

9. Restrict PEA Play companies to those which have Weekly options available.  These are the most actively-traded option markets and decent executions are generally available (which is often not the case with companies which trade only monthly options).  Selling Weeklys also means that you can exit the positions in just a few days rather than waiting until the month expires before the short-term options fall to their intrinsic value.

10. In about a third of the weeks, there will not be a viable PEA Play available, especially if Weekly options are to be sold.  Earnings announcements tend to lump together in a distinct season starting about the middle of January and extending for about six weeks (and then moving 90 days forward to the next quarterly reports).

11. While losses are possible with PEA Plays, the entire amount of the investment can never be lost because there will always be more value to the long side of the calendar spreads than the short value because of the additional time value to those options.

12. More conservative (with lower potential gains) PEA Plays can be made by choosing a wider range of strike prices for the calendar spreads.

13. We checked to see if hedge funds had recently bought (or sold) shares in the company, and concluded that such information was valuable in deciding whether to bet on a higher (or lower) stock price.  While hedge funds aren’t always right, they surely do intensive due diligence before investing or divesting, and they have far more resources to do this that any individual has.

14. A statistic that will need more study is the short interest ratio.  When an unusually high percentage of shares have been sold short, a short squeeze is possible that could result in a large upward move after the announcement, but except for the GMCR case (huge short interest, huge gain after the announcement), the short interest level did not seem to be a significant factor. 

.  Will we be able to continue making profitable PEA Plays every week for the next six weeks?  Probably not.  But it’s possible.  We plan to invest only about half our portfolio value in any given earnings play (and sometimes two in a week) so that if there is a 10% move in the opposite direction we expect, we won’t be left with no money to work with.  (If we feel really strongly about a trade, like we did in Green Mountain Coffee Roasters, we will invest more than half the portfolio value.)

So far, playing the earnings announcements has been fun, and profitable.  After reading this, I hope you decide that it would be a lot easier to become a Terry’s Tips Insider, sign up for Auto-Trade at thinkorswim, and let us make all the investment decisions.  You could also follow our Trade Alerts and place the trades at another broker if you prefer.

You can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account (even if you already have another account) at the best options broker around – thinkorswim. You must 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, and your service will extend for five full months after which you can decide on whether to continue or not.

I look forward to prospering with you.

Terry
Terry@TerrysTips.com

Two Earnings Play for This Week – Deere and Sina

Monday, May 13th, 2013

 The Green Mountain Coffee Roasters (GMCR) spread I recommended last week resulted in a 20% gain.  Not bad considering we were blindsided by their announcing a new 5-year deal with Starbucks that shot the stock 25% higher while we were betting on a lower post-announcement price.  Our gain was not as great as last week’s 50% gain on Apple, but we will take 20% anytime (I’m sorry, but I executed the Apple spreads in a Terry’s Tips portfolio and did not share it with the free newsletter subscribers).

 

 

 

This week I have two earnings-related plays which need to be made before the close on Wednesday if you want to participate.

 

 

 

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

 

 

 

Terry

 

 

 

Two Earnings Play for This Week – Deere and Sina

 

 

 

Sina Corporation (SINA) is pretty much the same as Yahoo but operates in China.  I have written a Seeking Alpha article about the company – How To Play The Sina Corporation Earnings Ann… in which I explain why I believe that the stock will probably dip a bit after Wednesday’s announcement (largely because expectations are high, the current valuation is pricey, and hedge funds are selling shares).

 

 

 

I recommended these trades to play the SINA announcement with the stock at about $59:

 

 

 

BTO 10 SINA Jun-13 55 puts (SINA130622P55)

 

STO 10 SINA May-13 55 puts (SINA130518P55) for a debit of $1.01  (buying a calendar)

 

 

 

BTO 10 SINA Jun-13 57.5 puts (SINA130622P57.5)

 

STO 10 SINA May-13 57.5 puts (SINA130518P57.5) for a debit of $1.11  (buying a calendar)

 

 

 

BTO 10 SINA Jun-13 60 calls (SINA130622C60)

 

STO 10 SINA May-13 60 calls (SINA130518C60) for a debit of $1.18  (buying a calendar)

 

 

 

These trades should make a gain if the stock goes up by less than 5% or down by less than 10% by Friday at the close.

 

 

 

The other earnings play involves Deere & Co. (DE) which has the unenviable record of falling four straight quarters after announcing, even when they bested expectations.  I have also written a Seeking Alpha article on this play – How To Play the Deere & Company Earnings Announcement.

 

 

 

Expectations are high here, too, and I expect a lower price than the current $93 after earnings.  Here are the spreads I am making in Deere:

 

 

 

Buy To Open 10 DE Jun-13 95 puts (DE130622P95)

 

Sell To Open 10 DE May-13 92.5 puts (DE130518P92.5) for a debit of $2.35  (buying a diagonal)

 

 

 

Buy to Open 5 DE Jun-13 90 puts (DE130622P90)

 

Sell to Open 5 DE May-13 90 puts (DE130518P90) for a debit of $.90  (buying a calendar)

 

 

 

These spreads will do well if the stock falls but start to lose money if the stock moves more than $2 higher.

 

 

 

Please check both Seeking Alpha articles for my complete reasoning for these spreads as well as a risk profile graph for each.

 

Update on the Green Mountain Coffee Roasters (GMCR) Trade

Thursday, May 9th, 2013

Update on the Green Mountain Coffee Roasters (GMCR) Trade

 

On Monday, I wrote to my free newsletter subscribers and recommended the following trade in advance of the company’s earnings announcement after the close on Wednesday:

 

Buy To Open 10 GMCR Jun-13 52.5 calls (GMCR130622C52.5)

Sell To Open 10 GMCR May2-13 57 calls (GMCR130510C57) for a debit of $3.70 (buying a diagonal) 

 

This spread would make a gain for the week if the stock managed to fall by less than 10%, stay flat, or go up by any amount.  The maximum gain would come if the stock fell by about $2 (to $57) after the announcement.

 

I also wrote a Seeking Alpha article explaining why I believed that the company would exceed expectations but the stock would fall slightly after the announcement for a couple or reasons (primarily because expectations were so high) – How To Play The Green Mountain Coffee Roaster…

 

My analysis on the earnings announcement was right on the money, but the company also disclosed that they had signed a 5-year deal with Starbucks (SBUX) that caused the stock to shoot higher by about 25%.  In my defense, there was no way I could have known about this wonderful news for GMCR stockholders.

 

I was able to sell the spread for only its intrinsic value ($4.50) because the stock had moved so much higher.  That resulted in a gain of 20% after commissions for the trade.

 

In most investments, a 20% gain in three days would be considered a fantastic return.  Actually, I was a little disappointed. I could have made double that amount if the
Starbucks news had come along at some other time than today.

 

Over a million dollars was invested in the GMCR Jun-13 52.5 calls on Monday after I made my recommendations, double or triple near-by option volume.  Clearly, lots of people heeded my advice.  I hope they are satisfied with a 20% return for the week.  I guess I am, reluctantly.

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.

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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.

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