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Posts Tagged ‘ebay’

A Remarkably Safe Way To Play The Apple Earnings Announcement

Tuesday, January 22nd, 2013

Apple announces earnings Wednesday after the close and I have come up with a strategy that looks like it can make a decent gain for the week (ranging from 5% to 15%) with almost no chance of incurring a loss. 

The big downside of the strategy is that it requires an investment of about $16,000.  I understand that many subscribers are looking for less costly option investments.

 However, if you can afford an investment of this size, check out the Seeking Alpha article I wrote just yesterday. 

Terry 

Here is the link – A Remarkably Safe Way To Play The Apple Earnings Announcement 

This is the third week in a row that I have offered a strategy centering on the unusually-high option prices in the series that expires just after an earnings announcement. 

The first play was for Wells Fargo – How to Play the Wells Fargo Earnings Announcement for Tomorrow.  This one gained 44% after commissions. 

The second play involved eBay – How to Play the EBAY Earnings Announcement.  I waited too long to close out my spreads this time around (many subscribers gained 24% or more).  But I did manage to make 11.6% after commissions, still not a bad week. 

I think this week’s earnings-announcement play is the safest one yet in spite of the high cost  requirement.  I am also sharing with paid subscribers a most promising play in Starbucks (SBUX).

Closing Out the eBay Spreads

Friday, January 18th, 2013

Closing Out the eBay Spreads 

All of the shot options could be purchased for $.01 (with no commissions due at thinkorswim) so I bought them all back. 

The earlier net cost I reported was inaccurate (in my note to subscribers, I recommended buying 10 of the 50 put spreads but I used 20 in the calculations).  The net investment after commissions was actually $3417.50 rather than the $3942.50 reported. 

This is what I sold the remaining Feb-13 options for (after subtracting the $.01 repurchase of the short options): 

10 Feb-13 50 puts for $.26 = $260 

20 Feb-13 52.5 puts for $.80 = $1600 

20 Feb-13 55 calls for $.90 = $1800

10 Feb-13 57.5 calls for $.23 = $230 

Commissions on sales – 60 x $1.25 = $75

Net received = $3815 

Cost = $3417.50 

Gain = $397.50, or 11.6%

While an 11.6% gain after commissions isn’t bad for a couple of days, it was far less than we expected going in.  The big disappointment came from how much implied volatility (IV) of the February options fell after earnings were announced.  I had estimated that it would fall from 35 to 33 (its number when there was a full month remaining in the January options).  Instead, IV tumbled all the way to 25 so that the February options were trading at prices much lower than we expected. 

Several subscribers have written in saying they took off the spreads on Thursday before IV had tumbled so much, and they made an average of about 24% after commissions. 

Knowing that IV will fall so much can be helpful in the future.  There are at least two things we might do differently.  First, we could buy longer-term options for the long side.  IV for the April options only fell 3 points after expiration.  While this would require a much larger investment, the net gain should be much higher. 

The other possibility would be to sell next-month iron condors just before the earnings announcement.  After the announcement, when IV for those options crashes it should be possible to close out the spread at a nice gain (not waiting until expiration).  The risk should be quite low here. 

Next week, in our Terry’s Trades portfolio, we will be placing calendar spreads in advance of the Starbucks earnings announcement on Thursday.  IV for the Weeklys we will be selling is 45 while the Feb-13 options carry an IV of 28 but the April options are only at 24 so they are likely to fall not nearly so far. 

In addition to placing the calendar spreads with April as the long side, I will personally sell an iron condor in the Feb-13 series to see how that compares to the calendar spreads.

 Of course, I will report back to let you know how each of these strategies perform.

Update on eBay Trades

Thursday, January 17th, 2013

Update on eBay Trades

With the stock up nicely today, I am taking off the put calendar spread at the 50 strike:

BTC 20 EBAY Jan-13 50 puts (EBAY1301029P50) for $.02 (no commission)

STC 20 EBAY Feb-13 50 puts (EBAY130216P50) for $.28

I plan to wait until near the end of the day tomorrow to take off the remaining spreads.

At this point, I could close out all the positions and make a gain of about 25% after commissions.  This was a disappointment.  The problem was that I estimated that the IV of the February options would fall from 35 to 33 (as that is what January options carried with four weeks of remaining life.  IV fell all the way to 27 and reduced the gain that I originally expected.

Happy trading.

Terry

How to Play the EBAY Earnings Announcement

Tuesday, January 15th, 2013

How to Play the EBAY Earnings Announcement

The following is a list of trades I made I made in my personal account this morning.

EBAY will disclose earnings after the close on Wednesday, January 16th.  As usual, Implied Volatility (IV) of the Jan-13 options (66) is greater than the Feb-13 options (35) due to the uncertainty of the earnings numbers.  This gives calendar spreads a considerable IV advantage.

According to WhisperNumbers.com, over the last 10 years, EBAY has exceeded the whisper numbers by more than a 2 – 1 margin.  This time around, both the analysts and the whisperers agree on a $.69 earnings number.

The trend for the company is surely positive, another indicator that things might be getting better:

ebay graph

ebay graph

It appears that at the last two earnings announcement dates the stock has gapped higher, nearly 10% both times.  The big danger with buying calendar spreads is that kind of a move.  For that reason, I plan to hedge my bet here and buy some uncovered out-of-the-money Feb-13 57.5 calls just in case history repeats itself.

Today, with EBAY trading at $53.00,  I bought 20 each Feb-13 – Jan-13 calendar spreads at the 50 and 52.5 strikes (using puts) and at the 55 strike using calls.  In addition, I stuck my head way out and bought 10 uncovered Feb-13 57.5 calls.

One of the persistent problems with placing calendar spreads in advance of earnings is that the IV of the long side falls after the announcement.  I suspect that this will not be much of a problem this time around.  I checked back a month ago and learned that IV for the Jan-13 options series with four weeks of remaining life was 33, which is only marginally lower than today’s Feb-13 level 35.  So the Feb-13 option prices shouldn’t plummet after the January options expire.

Here is the risk profile graph for my positions:

ebay risk profile graph

ebay risk profile graph

These are the positions I have:

ebay positions

ebay positions

  For those of you who prefer seeing these trades as I placed them, here they are:BTO (buy to open) 10 EBAY Feb-13 50 puts (EBAY130216P50)
STO (sell to open) 10 EBAY Jan-13 50 puts (EBAY130129P50) for a debit of $.50  (buying a calendar)

BTO 20 EBAY Feb-13 52.5 puts (EBAY130216P52.5)
STO 20 EBAY Jan-13 52.5 puts (EBAY130129P52.5) for a debit of $.56  (buying a calendar)

BTO 20 EBAY Feb-13 55 calls (EBAY130216C55)
STO 20 EBAY Jan-13 55 calls (EBAY130129C55) for a debit of $.54  (buying a calendar)

BTO 10 EBAY Feb-13 57.5 calls (EBAY130216C57.5) for $.58
These positions cost $3780 to place and commissions worked out to $162.50 at thinkorswim for a total investment of $3942.50.  I placed these trades when EBAY was trading right at $53.  According to the graph, EBAY can fall over $4.00 before I lose anything on the downside, and a profit will result no matter how much it moves higher.  I really like these possibilities.

With a month to go until expiration, an at-the-money EBAY option should be trading about $1.50, or almost three times as much as the average calendar spread here costs.  If the stock ends up Friday afternoon near any one of the strikes for these calendar spreads, one of the spreads should be a triple-bagger.

The graph shows that if EBAY closes at any point between $52 and $56 on Friday, these positions could make as much as 100% (including commissions, our best goal should be in the 70% to 80% range, however, especially if we close them all out before waiting until the last minute).

The big risk is on the downside.  If the stock falls more than $4, a loss would occur.  If you wanted to expand the downside break-even point you would buy additional spreads at the 50 strike.

I want to thank our old friend Fred for sending along this possible strategy.  If you do it and it doesn’t  work out, please blame Fred instead of me.  I won’t blame him no matter what happens – he has given me so many good ideas over the years that I will still be way ahead if this one does badly.

As usual, don’t invest any money that you can’t afford to lose.  Good luck to all of us.

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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.

~ John Collins