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Archive for the ‘Last Minute Strategy’ Category

Options Strategy for the Tesla Motors Earnings Announcement

Tuesday, February 19th, 2013

Last week I gave you an option play on Buffalo Wild Wings (BWLD) that ended up making a 63% gain.  This week I am offering another pre-earnings announcement, this time on Tesla Motors (TSLA).  If you want to try this strategy you will have to hurry because the announcement is due after the close on Wednesday, February 20. 

Options Strategy for the Tesla Motors Earnings Announcement 

In case you want to know the details of my thoughts on this company which makes electric cars, check out my Seeking Alpha article – How to Play the Tesla Motors Earnings Announcement.  

In a nutshell, I think the likelihood of the stock going up after the announcement is very low.  To my way of thinking, it is hopelessly overvalued and even the best of news shouldn’t push it much higher (it has already soared about 50% since August on no more than hope that their new Model S will be a big hit). 

On the other hand, there are a large number of issues (including earnings) that might very well depress the stock.  Here is what I would do: 

With the stock trading around $37, buy TSLA June 39 calls and sell March 37 calls.  This diagonal spread will cost about $1.05 ($105) to place (the natural price is $1.15 but a lower execution should be possible).  There will be a $200 maintenance requirement per spread.  If TSLA ends up at any price below $37 when the March options expire on the 15th, they will be worthless and I will end up owning June 39 calls which surely should be worth more than $1.05 (currently $3.00 – $3.40).  I hope to exit the positions shortly after the announcement is made. 

I also plan to buy half as many June-13 – March-13 33 put calendar spreads (cost about $1.90) to protect me against a possible 10% drop in the stock after the announcement.  If you bought 10 of the above diagonals and 5 of these calendar spreads, your total outlay would be about $4000 (mostly the non-cash $2000 maintenance requirement on the 10 diagonal spreads). 

One disadvantage with these spreads is that it might be necessary to wait as long as 3 ½ weeks to get the maximum possible return, but I expect an earlier exit will be possible at a slightly less than the maximum gain.  I am aiming for a 25% gain on these spreads. 

We will be placing these spreads in one of our Terry’s Tips portfolios on Tuesday or Wednesday.

Terry’s Tips Subscribers Score Big Win With NTAP Earnings Play

Thursday, February 14th, 2013

Terry’s Tips Subscribers Score Big Win With NTAP Earnings Play

In anticipation of Network Appliance’s (NTAP) earnings announcement after the close on Wednesday, February 13, on Monday the following trades were made when the stock was trading about $35.50:

BTO 15 NTAP Jun-13 38 calls (NTAP130622C38)
STO 15 NTAP Feb-13 36 calls (NTAP130216C36) for a debit limit of $.77 (buying a diagonal)

BTO 12 NTAP Jun-13 33 puts (NTAP130622P33)
STO 12 NTAP Feb-13 35 puts (NTAP130216P35) for a debit limit of $.82  (buying a diagonal)

These trades cost $2139 to place plus $68 in commissions for a total of $2207.  In addition, the broker imposed a $3000 maintenance requirement on the account (15 contracts at $200 each – the 12 put spreads did not require a charge because we couldn’t lose on both put and call spreads – it was essentially a short iron condor).

On Thursday, the morning after the announcement, the following trades were executed while NTAP fluctuated between $35 and $36:

BTC 15 NTAP Feb-13 36 calls (NTAP130216C36)
STC 15 NTAP Jun-13 38 calls (NTAP130622C38) for a credit limit of $1.28  (selling a diagonal)

BTC 6 NTAP Feb-13 35 puts (NTAP130216P35)
STC 6 NTAP Jun-13 33 puts (NTAP130622P33) for a credit limit of $1.39  (selling a diagonal)

BTC 6 NTAP Feb-13 35 puts (NTAP130216P35)
STC 6 NTAP Jun-13 33 puts (NTAP130622P33) for a credit limit of $1.50  (selling a diagonal)

The total collected from these sales was $3654 less $68 commissions, or $3586.  The profit was $1379, or 62% of the cash outlay for the spreads.

There is a question as to how much of the $3000 maintenance requirement was actually at risk since the long sides had 4 months of remaining life and would have a value no matter where the stock price ended up.  If we assume that half this amount was truly at risk, the return for the trades would be reduced to 37%.

Whether the actual return after commissions was 62% or 37%, it was a nice Valentine’s Day for the Terry’s Tips subscribers who participated in these trades.


Closing Out the Buffalo Wild Wings (BWLD) Spreads

Wednesday, February 13th, 2013

Closing Out the Buffalo Wild Wings (BWLD) Spreads

If you recall, on Monday I recommended buying the following two spreads while BWLD was trading about $77 in advance of Tuesday’s earnings announcement after the close:

BTO (buy to open) 6 BWLD Jun-13 85 calls (BWLD130622C85)
STO (sell to open) 6 BWLD Feb-13 80 calls (BWLD130216C80) for a debit of $1.40  (buying a diagonal)

BTO (buy to open) 4 BWLD Jun-13 70 puts (BWLD130622P70)
STO (sell to open) 4 BWLD Feb-13 75 puts (BWLD130216P75) for a debit of $.90  (buying a diagonal)

In my personal account, after sending out this recommendation, just to make sure these prices were still available, I bought the above spreads.  I paid $1.39 for the call spread and $1.35 for the put spread.

These two spreads cost $1374 plus $25 in commissions for a total cost of $1399.  There was a $3000 maintenance requirement charged by the broker, although I figured that the actual amount at risk was no more than half that amount because the long puts and calls both had five months of remaining life and would have value (the broker assumes that you don’t sell them as soon as you can and just let them expire worthless). 

So to my way of thinking, I risked about $2900 on these spreads although I had to leave an additional $1500 in my account alone for what worked out to be a single day.

On Wednesday after the announcement the stock had hardly changed from what it was at the open on Monday, $77, although it had move about $4 higher late Tuesday and opened about $4 lower on Wednesday.

At about 10:30 a.m. I sold the call spread for $2.51 and the put spread for $2.42, collecting $3274 less $25 commissions, or $3249.  That gave me a cash profit of $1850 on my adjusted $2900 at risk.  That works out to a 63% gain for the trades.

I would have made just about the same gain if the stock ended up at any price between $75 and $80.  If I had waited until Friday to close out the spreads, I would have made more if it fell in that range, but I will take a 63% profit for a couple of days any time.

This is the third similar trade I have made with pre-earnings announcement companies in the last three weeks, and all three trades have had similar profitable results.

Options Strategy for the Buffalo Wild Wings Earnings Announcement

Monday, February 11th, 2013


Last week I wrote an article explaining why I thought that Green Mountain Coffee Roasters (GMCR) would move higher after its earnings announcement.  I was totally wrong.  The stock fell by nearly $5. 

In one of my Terry’s Tips portfolios, I placed a diagonal spread which would do best if GMCR moved higher (as I expected it would at the time).  In spite of its moving lower, I closed out the spread the day after earnings for a 30% gain after commissions.  Not a bad return when you are totally wrong. 

Today I would like to propose a similar diagonal spread to be used on another company which will announce earnings next week (on Wednesday, after the close).

Options Strategy for the Buffalo Wild Wings Earnings Announcement 


I really don’t know much about Buffalo Wild Wings (BWLD).  I have never visited one of their restaurants and don’t think I have ever seen one in New England.  But options on the stock are extremely interesting to me.  The Feb-13 options that expire on Friday, February 15th carry an implied volatility (IV) of 80 while longer-term options such as the Jun-13 series has an IV of only 36.  That means the February options are more than twice as expensive as the June options. 


I would like to buy June options and sell February options before Wednesday’s announcement. 


I learned everything I could about the company, and wrote an article for Seeking Alpha on it – How To Play The Buffalo Wild Wings Earnings Announcement Next Week.  The most important thing I learned was that some big options players were betting that the stock would tank after earnings (and Jim Cramer suggested selling it as well).  I thought the P/E was too high considering its growth rate which put me in the bearish camp as well.  All these ideas suggested to me that the stock was more likely to fall next week than it is to move higher. 


With that scenario in mind, here is the spread that I will be buying (for a $5000 portfolio) with the stock trading about $77: 


BTO (buy to open) 6 BWLD Jun-13 85 calls (BWLD130622C85)


STO (sell to open) 6 BWLD Feb-13 80 calls (BWLD130216C80) for a debit of $1.40  (buying a diagonal)  


If the stock stays flat or goes down by any amount by Friday’s close, the Feb-13 80 calls will expire worthless and I will end up holding Jun-13 85 calls which should have a value well in excess of $1.40 (they are worth $3.60 right now).  The greatest gain for this spread would be if the stock edged up to $80 and the February calls expired worthless while the June calls might be worth more than they are right now.  You can see how this spread can make money even if you aren’t right about how you think about the stock. 


The above diagonal spread would require a maintenance requirement of $500 per spread in addition to the $140 cost to buy the spread.  This is not a loan like a margin purchase would involve, but the broker puts a hold on $500 in your account that can’t be used for other purposes.  The reason for this maintenance requirement is that theoretically you could lose that much if the stock rose sharply and you had to buy back the Feb-80 calls, and then you did nothing for five months and let the June options expire worthless.  Of course, since the June options have five additional months of life, they would have a good value if you sold them next week instead of waiting.  This means that from a practical standpoint, the $500 potential loss is not really totally at risk because you plan to sell the June options next week while they still have a good value.  


Just in case I am wrong in my assessment of this company, I will also place the following diagonal spread:


BTO (buy to open) 4 BWLD Jun-13 70 puts (BWLD130622P70)


STO (sell to open) 4 BWLD Feb-13 75 puts (BWLD130216P75) for a debit of $.90  (buying a diagonal)  


There will not be a maintenance requirement on this spread because you can’t lose $500 on both this spread and the call spread placed above.  This put spread will do best if the stock falls to $75 and expires worthless while the June 70 puts should increase in value (currently $3.80).  If the stock moves higher, above $75, the February 75 puts expire worthless and the June 70 puts will retain some value because they have five more months of remaining life. 


If the stock ends up between $75 and $80, both spreads should make excellent gains.  Losses should come about only if the stock moves over 8% on the upside or over 10% on the downside.  That is quite a large range of possible prices for the two days the options will be held.  


If you are totally bearish on the stock you would only place the diagonal call spread.  If you are strongly bullish on the stock you would only place the diagonal put spread. It seems a little ironic that the best spread to buy if you think the stock is headed down uses calls while the best spread to buy if you think the stock is headed higher uses puts. But that’s the way it is in the crazy world of options. 

I expect these spreads will yield at least the 30% I made last week while being wrong about GMCR.  Just imagine how much you could make if you were right.

Options Strategy for the Green Mountain Coffee Roasters Earnings

Tuesday, February 5th, 2013



After the market close tomorrow, Green Mountain Coffee Roasters (GMCR) will announce quarterly and year-end earnings.  I am quite bullish on the stock, and have written a Seeking Alpha article explaining why – Why Green Mountain Coffee Roasters Will Soar This Week 

(I apologize for its being so long, but as Abraham Lincoln once said in a letter he wrote to a friend, I didn’t have enough time to make it shorter.)

Options Strategy for the Green Mountain Coffee Roasters Earnings

If you I have a strong feeling for a particular stock prior to their making an earnings announcement, there are a couple of strategies I like to employ.  I would like to tell you about one of them today.  It involves a little hedge just in case I am wrong (with this hedge, I won’t lose all my money). 


An aggressive strategy if you were very bullish on a stock would be to sell an at-the-money put in the shortest-term option series available (for GMCR, (that would be the Feb2-13 options expiring on Friday February 8, two days after the Wednesday after-close announcement).  Option prices in this series tend to escalate to about double or triple their usual implied volatility, making them very “expensive”.  Since you don’t want to sell any option all by itself (they call that naked selling because that’s how you feel whenever you do it, totally exposed), you must buy some other  put to cover yourself (and avoid a horrendous margin requirement from your broker).  If you bought lower-strike Feb2-13 puts, you would collect a credit on your spread sale (called a vertical put spread), and there would be a maintenance requirement of $100 for each dollar of difference  between the strike prices. 


For example, with GMCR selling about $48, you could buy a Feb2-13 43 put and sell a Feb2-13 48 put and collect about $2.  There would be a maintenance requirement of $500 less the $200 you collected from the vertical spread sale.  Your maximum loss is $300 and this would come about if the stock fell to below $43 from the $48 where it was before the announcement. 


With this spread, you are hoping that the stock closes on Friday at any price above $48.  If it does, both your long and short puts will expire worthless and you save paying commissions on closing out the positions.  You just end up with $200 (per spread, less commissions) in your account and the maintenance requirement goes away.  You would have made about 65% after commissions on your $300 at risk. 


What I do (the hedge) is a little different.  Instead of buying the lower-strike put in the same series, I go out to a longer period series.  I might buy a Feb-13 43 put (which expires February 15, a week later) instead of the Feb2-13 43 put.  It would only cost me about $.30 more (i.e., I would collect about $1.75 instead of $2.00 at the beginning), but if I wrong about GMCR and the stock falls instead of moving higher, this put might have a decent value when the Feb2-13 45 put expires in the money.  If the stock is below $48 at expiration, I will buy it back on Friday and sell my Feb-13 43 put at the same time.   


If the stock falls over $3, I will probably lose money on the original spread, but I will gain some of the loss back from selling the Feb-13 43 put.  It is not a perfect hedge, but it reduces the maximum loss from $300. 


I have placed this exact spread in my personal account – it is called buying a diagonal put spread.  I received $1.75 and hope to collect that much per spread on Friday (plus whatever I can collect from selling the Feb-13 43 put that that has a week of remaining life.



A Post-Earnings Starbucks (SBUX) Play

Monday, January 28th, 2013

In our efforts to find  new and different option opportunities in this world of 5-year-low SPY option prices, we have been checking out pre-earnings-announcement strategies. 

Just prior to the earnings announcement, implied volatility (IV) of the options which expire just after the announcement escalates due to the uncertainty of what the earnings, sales, margins, or guidance might be. 

We have had some success buying calendar spreads at strikes below, near, and above the stock price in advance of an earnings announcement.  These spreads have a tremendous IV advantage (the options we sell have a higher IV, making them more “expensive” than the options we buy). 

Last week, we used this strategy on Starbucks (SBUX).  When we used just the calendar spreads, we managed to make 11% after commissions by selling the spreads the day after the announcement. This was out fourth consecutive week of making pre-earnings announcement gains. 

In addition to the calendar  spreads, we also bought some extra straddles or strangles (both puts and calls) which were designed to protect the entire portfolio against a loss in case the stock moved big-time after the announcement.  This time around, with SBUX edging up about $1.50 after the announcement, the straddle-strangle protection lost money when IV for those options plummeted after the announcement, and the portfolio that used both calendars and strangles broke even for the week. 

While studying the past history of SBUX we discovered an interesting pattern which is the subject of this week’s Idea of the Week. 


 A Post-Earnings Starbucks (SBUX) Play 

Last week SBUX rose $2.00 for the week, spurred higher by a good earnings report and the company re-affirming guidance.  We checked back over the last 13 times when SBUX rose by $2.00 or more in a week and learned that in the subsequent weeks, 10 times at some point during the week, SBUX traded at least $1.00 lower. 

With SBUX trading at $56.81, I will be buying Mar-13 57.5 puts, hopefully paying about $2.19, Friday’s closing ask price.  Immediately after making this purchase I will place an order to sell those puts for $.70 higher than what I paid for them (if the stock falls by $1.00 this put option should move $.70 higher).   

If this trade executes, I should make about 30% on my money after commissions. 

If the stock starts moving higher instead of lower, I will sell some Feb1-13 57.5 puts to reduce or eliminate possible losses (but I will be careful not to sell quite as many puts as I own long ones so that if the stock does fall, I should still make a gain). 

I expect to close out the positions by the end of the week unless the stock has edged up to being very close to $57.50 in which case I might sell the next Weekly series 57,5 puts because the time premium should be quite high (and I have six more weeks over which I can continue to  sell puts at this strike so that I can get back my initial $2.19 back, and more).

Closing out the APPLE Pre-Earnings Spreads

Friday, January 25th, 2013

The AAPL crash after the earnings announcement surely hurt a lot of people big-time (several people had commented that just buying calls was the smart way to approach the announcement, and others said they were selling out-of-the-money puts to be more “conservative” – they are the ones who got hurt the most – at least the call buyers only lost their entire investment).

 If you recall, in my Seeking Alpha article entitled A Remarkably Safe Way To Play The Apple Earni…  I recommended buying one AAPL Apr-13 500 straddle and selling one Jan4-13 500 straddle to take advantage of the huge difference in IV between them (April = 34, Jan4-13 = 76).  In addition, I said to buy two Apr-13 500 straddles to protect against a large move in AAPL in either direction. 

The difference between the first two straddles came up to $2900, and the extra two straddles cost $6500 each (I actually got better prices than these, but let’s go with the numbers I used in the article). 

I waited until Friday about noon to close out the positions.  AAPL had fallen all the way to $440, down about $60 since I placed the spreads, and $75 from where it had closed just before the announcement. 

I closed out the long and short straddles by selling both the  puts and calls as a calendar spread, collecting $570 for the calls and $750 for the puts.  So I lost money on those spreads (cost $2900, sold for $1320, lost $1580). 

The extra two straddles were sold for $7350 each ($14,700 total) compared to the $13,000 cost for a gain of $1700.  Bottom line, after paying $15 in commissions, I eked out a gain of $105 for the day. 

I consider myself lucky, especially waiting until Friday to close it out (the stock fell another $10 by the time I sold so I did better with the extra straddles than I would have done closing out on Thursday).  

I suspect that my small gain was a whole lot better than most option-players experienced this earnings week (I surely did a whole lot worse in many of my other spreads, most calendars at higher strike prices than $500 – all of which lost big time).

It ended up being one of the worst weeks ever for me, in fact. 

The biggest reason that the “remarkably safe” positions I  recommended  did not do anywhere near what the risk profile graph had suggested the spreads might gain was because IV of the April options fell far more than I expected.  Before the announcement, IV was 34, lower than any other option month.  After the announcement, IV tumbled to 29.  The at-the-money straddle would cost $4900 to buy compared to the almost $6500 that I paid for the April at-the-money straddle a couple of days earlier. 

The at-the-money Feb1-13 440 straddle with a week to go until expiration (as I write this with AAPL at $440) could be sold for $1730 or just about half what the at-the-money straddle with a week of remaining life could be been sold for prior to  the announcement. 

In conclusion, it is important not to get too excited about the risk profile graphs that get created before an earnings announcement (unless your software allows you to set an expected IV of the longer-term options). 

The inevitability of all option prices falling dramatically after the earnings announcement makes calendar and diagonal spreads difficult to execute profitably at the time.

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. 


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.


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