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 

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

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

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

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

These are the positions I have:

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.

Closing Out the Wells Fargo Spreads
Yesterday I shared with you some trades I made in advance of Wells Fargo’s (WFC) earnings announcement before the bell today.  I bought 30 Feb-13 – Jan2-13 35 call calendar spreads for $.34, shelling out $1020 plus $75 in commissions at thinkorswim.  I also bought 30 Feb-13 – Jan2-13 diagonal call spreads (buying 36 calls and selling 35.5) for a debit of $.16. (There is a small maintenance requirement here for one day.)  These cost me $480 plus $75 in commissions.  My total money at risk is $1500 plus $150 in commissions, or $1650.
Earnings slightly exceeded the whisper numbers but the stock fell about $.60 from yesterday’s close (a change which was well within the profit range.  Rather than try to squeeze out a few extra dollars of profit, I decided to take the gains that were there at 10:30.
I bought back the Jan2-13 expiring calls for $.03 (thinkorswim does not charge a commission when you buy back a short call for $.05 or less).  Then I sold the Feb-13 36 calls for $.31.  This worked out to a net credit of $.28 compared to the $.16 I had paid for the spread.
Then I placed a limit order to close out the 35 calendar spread for $.55 and it executed quickly.  That spread had cost me $.34 so there was a nice profit there as well.
In total, I collected $2490 for the two spreads and paid $112.50 in commissions for a net gain after commissions of $727.50 ($2387.50 – $1650.00).
These trades made 44% on the investment for the day.  I might have collected a bit more if I had waited, but as the old adages go, you don’t go broke taking profits, and bulls make money and bears make money but pigs get slaughtered.
It is a happy day for me whenever I can collect 44% after commissions for a day of trading.  Most people would be delighted to make that much on their money for an entire year.
I will be looking for similar pre-earnings plays where strong implied volatility advantages are often possible, and will pass them along to you.

Wells Fargo & Company (WFC) will announce earnings tomorrow.  What is interesting to me is that Implied Volatility of the Weeklys that expire tomorrow is 52 while the IV of the February options is only 21.

As is often the case going into earnings, there is a huge IV advantage to buying calendar spreads, buying the “cheaper” February options and selling the “costlier” Weeklys with only one day of remaining life.

The important thing, as always when trading calendar spreads, is to pick the right strike price.  I like to make the assumption that I really don’t know which way the stock will move after the announcement but to buy calendar spreads at at least two strike prices so I have a range within which I will make money (maximum gains come when the stock closes on Friday at exactly a strike price of the calendar spreads you have bought).
The whisper number for WFC is $0.92, three cents ahead of the analysts’ estimate. WFC has a 42% positive surprise history (having topped the whisper in 14 of the 33 earnings reports for which we have data).
The average price movement (starting at next market open) within ten trading days of all earnings reports is +2.1%.  That is the important number for me.  That represents a move of about $.74 for a stock trading right at $35 today.
Today I bought in my personal account 30 Feb-13 – Jan2-13 35 call calendar spreads for $.34, shelling out $1020 plus $75 in commissions at thinkorswim.  I also bought 30 Feb-13 – Jan2-13 diagonal call spreads (buying 36 calls and selling 35.5) for a debit of $.16. (There is a small maintenance requirement here for one day.)  These cost me $480 plus $75 in commissions.  My total money at risk is $1500 plus $150 in commissions, or $1650.
At the end of the day tomorrow, I will buy back any in-the-money short calls I have and will probably unload the February calls as well.  The risk profile graph shows that I will make a gain if the stock moves less than $1 in either direction:  

If the stock moves less than a dollar either way I should make a profit.  If I am lucky enough for it to close between $35 and about $35.70, I could double my money.  It is sort of fun to have a little investment like this that could double in a single day.  Worst case scenario, I will have 60 calls which have a five weeks of remaining life.  It seems to me that it is unlikely that they will be worth less than an average of $.28 which would be a break-even number for me.

We all know that market makers have an incentive to push the stock price (through using their essentially unlimited market power) to manipulate the stock price to exactly a strike price on expiration Friday (after all, they are usually the sellers when the public buys puts and calls).  If the stock ends up exactly at a strike  price, all those puts and calls they have sold will expire worthless.

If they pick $35 as their price target, I will celebrate with a big night on the town this weekend.

On Monday I submitted an article to Seeking Alpha -, Why Herbalife Should Move Higher From Here

I recommended buying calendar spreads at one strike below the current price of Herbalife (HLF) and two strikes above the current price so that you didn’t much care which way the stock moved as long as it didn’t go absolutely crazy on the downside.

In a Terry’s Tips portfolio, we bought Feb-13 – Jan2-13 calendar spreads at the 35, 37.5, 40 and 42.5 strikes when the stock was trading at $28.57.  On Tuesday and Wednesday, the stock moved up by about $2.50 and we added another calendar at the 45 strike.

The company has made a public announcement today refuting the claims of Bill Ackman, and the stock has been gyrating in both directions, although not by huge margins.  As I write on my lunch break on Thursday, the stock is trading at $40, down about a dollar for the day.

Our little portfolio has gained 20% after commissions since Monday, and the risk profile graph shows that we should pick up even more tomorrow as long as the stock doesn’t fll by more than another $2 by the close tomorrow:

I am a little tempted to close out the positions and take a 20% gain for the week, but the break-even range seems large enough that I will wait another day and  hope for another 10% or so.

Two messages  again today – first, a reminder that in celebration of the New Year, I am making the best offer to come on board that I have ever offered.  The offer expires in three days.  Don’t miss out.

Second, one of our portfolios gained an astonishing 124% last week.  I want to tell you about this portfolio, reveal the exact positions we hold, and show how it should unfold next week (and thereafter).

How the Dog of Dogs Portfolio Made 124% Last Week

This portfolio is based on the expectation that the volatility ETN VXX will continue its downward slope in the future.  The following is an excerpt from the weekly newsletter I send to my paying subscribers:

Summary of Dog of Dogs Portfolio

This $5000 portfolio is designed to take advantage of the long-term inevitable price pattern of VXX.. Because of contango, the way it is constructed, and the management fee, the stock is destined to fall over the long term.  Twice in the last three years, 1 – 4 reverse splits had to be made so there would be some reasonable price to trade.  We use calendar spreads at strikes below the underlying price.
As a reminder why we call this the Dog of Dogs portfolio, here is the 4-year graph of this ETN since it was formed:

The stock never really traded for $2800 as the graph suggests – adjusting for the two reverse splits made it seem that way.  This surely is the worst-performing “stock” in the entire universe over the past four years.

Here are the current positions we hold in this portfolio:

Results for the week: With VXX down $7.88 (22.2%) for the week, the portfolio gained $3,361 or 142.1%. We were patient while VXX headed higher due to fiscal cliff uncertainties, and this week our patience was rewarded as VXX fell big-time. Next week looks potentially great even if VXX does not continue to fall. A flat or lower price for VXX should result in a double-digit gain for the week.

The risk profile graph shows that if the stock is at the same level ($27.55) next Friday, the premium we collect from having sold puts at the 27, 28, and 28.5 strikes will decay sufficiently to return a gain of $740 (about 12%) even if the stock does not fall as history suggests it will. The graph also shows that a double-digit gain for the week can be expected at almost any lower price for the stock as well (this is possible because we hold six extra uncovered long puts).

Note: Most Terry’s Tips paying subscribers mirror this portfolio (and/or others of our 8 total portfolio offerings) through the Auto-Trade program at thinkorswim rather than making the trades on their own.  We invite you to join us as a paying subscriber at the lowest price we have ever offered.

Three weeks ago I wrote an article about how to play the unusual stock action pattern of Apple (AAPL). – Play Apple Volatility With A Unique Weekly Options Strategy

For some unclear reason (most likely options-related, at least to my way of thinking), AAPL tends to fall on Fridays, often quite dramatically, and to move higher on Mondays.

At that time, I suggested that buying at-the-money puts Thursday near the close (or shortly after the open on Friday) would often result in extraordinary gains if you sold the puts near the close on Friday.  For the past three weeks, this pattern has continued in spades.

The stock fell on Friday in those three weeks by $19.90, $2.40, and $5.47.  Since at at-the-money put with a single day of remaining life would cost about $4, your average gain over these three weeks works out to more than 150% per week.  During these three weeks, greater gains were possible by buying the puts before the close on Thursday rather than after the open on Friday (in the prior 12-week test, the stock often opened up a bit higher on Friday, suggesting that might be a better entry point).

The results for Mondays were not as dramatic, but still quite impressive.  Of course, buying an at-the-money call either Friday near the close or near the open on Monday would cost closer to $10 because there would be five trading days remaining rather than only one, so the initial cost of the option would be about double the amount required to buy puts in anticipation of the Friday drop.

Over the last three weeks, on Mondays, AAPL has moved higher by $9.04, $.84, and $22.58.  Substantial gains would have come your way in two of the three weeks with probably a break-even in the week when the stock budged up only $.84.

Will this Friday-Monday pattern continue?  No one knows, for sure.  My experience is that trading patterns identified by back-testing do not always hold up going forward.  But somehow this one seems different.  Until the pattern is broken, at least buying puts near the close on Thursday seems like a good bet.  Even if you lose the entire bet on occasion, there have been so many Fridays when the drop has been substantial, over time, the returns could have been extraordinary.

At heart, I am not an option buyer.  I prefer collecting decay from selling short-term options (using longer-term options as collateral rather than stock).  But for many months now, the daily and weekly fluctuations in AAPL have been considerably higher than the implied volatilities of the options would suggest.  As long as this pattern persists, buying AAPL options rather than selling them seems be in order, especially when there us some reason to believe that buying a put or call (rather than a straddle or strangle) gives you an edge.  The Friday-Monday phenomenon might just be the edge you need.

To celebrate the coming of the New Year I am making the best offer to come on board that I have ever offered.  It is time limited.  Don’t miss out.

Invest in Yourself in 2013 (at the Lowest Rate Ever)

The presents are unwrapped.  The New Year is upon us.  Start it out right by doing something really good for yourself, and your loved ones. 

The beginning of the year is a traditional time for resolutions and goal-setting.  It is a perfect time to do some serious thinking about your financial future.

I believe that the best investment you can ever make is to invest in yourself, no matter what your financial situation might be.  Learning a stock option investment strategy is a low-cost way to do just that.

As our New Year’s gift to you, we are offering our service at the lowest price in the history of our company.      If you ever considered becoming a Terry’s Tips Insider, this would be the absolutely best time to do it.  Read on…

Don’t you owe it to yourself to learn a system that carries a very low risk and could gain 36% a year as many of our portfolios have done?

So what’s the investment?  I’m suggesting that you spend a small amount to get a copy of my 70-page (electronic) White Paper, and devote some serious early-2013 hours studying the material. 

And now for the Special Offer – If you make this investment in yourself by midnight, January 9, 2013, this is what happens:

For a one-time fee of only $39.95, you receive the White Paper (which normally costs $79.95 by itself), which explains my two favorite option strategies in detail, 20 “Lazy Way” companies with a minimum 100% gain in 2 years, mathematically guaranteed, if the stock stays flat or goes up, plus the following services :

1) Two free months of the Terry’s Tips Stock Options Tutorial Program, (a $49.90 value).  This consists of 14 individual electronic tutorials delivered one each day for two weeks, and weekly Saturday Reports which provide timely Market Reports, discussion of option strategies, updates and commentaries on 8 different actual option portfolios, and much more. 

2) Emailed Trade Alerts.  I will email you with any trades I make at the end of each trading day, so you can mirror them if you wish (or with our Premium Service, you will receive real-time Trade Alerts as they are made for even faster order placement or Auto-Trading with a broker).  These Trade Alerts cover all 8 portfolios we conduct.

3) If you choose to continue after two free months of the Options Tutorial Program, do nothing, and you’ll be billed at our discounted rate of $19.95 per month (rather than the regular $24.95 rate).

4) Access to the Insider’s Section of Terry’s Tips, where you will find many valuable articles about option trading, and several months of recent Saturday Reports and Trade Alerts.

5) A FREE special report “How We Made 100% on Apple in 2010-11 While AAPL Rose Only 25%”. This report is a good example of how our Shoot Strategy works for individual companies that you believe are headed higher.

With this one-time offer, you will receive all of these benefits for only $39.95, less than the price of the White Paper alone. I have never made an offer better than this in the twelve years I have published Terry’s Tips.  But you must order by midnight on January 9, 2013.  Click here, choose “White Paper with Insider Membership”, and enter Special Code 2013 (or 2013P for Premium Service – $79.95).

Investing in yourself is the most responsible New Year’s Resolution you could make for 2013.  I feel confident that this offer could be the best investment you ever make in yourself.

Happy New Year!  I hope 2013 is your most prosperous ever.  I look forward to helping you get 2013 started right by sharing this valuable investment information with you. 
Terry

P.S.  If you would have any questions about this offer or Terry’s Tips, please call Seth Allen, our Senior Vice President at 800-803-4595.  Or make this investment in yourself at the lowest price ever offered in our 8 years of publication – only $39.95 for our entire package – using Special Code 2013 (or 2013P for Premium Service – $79.95).