Last week I wrote two Seeking Alpha articles on earnings plays – How To Play The Costco Earnings Announcement and How To Play Joy Global’s Earnings Announcement. I expected that Costco would fall after earnings because expectations were unusually high and that JOY would move higher because expectations were quite low.
I was right on with the COST call and our positions gained 16.6% after commissions for the week. JOY fell marginally, less than $.50 and we gained 7.8%.
Update on the Costco trade (submitted as a comment after the Costco article). Today before the open, Costco announced earnings of $1.04 which beat estimates of $1.02 but fell short of the $1.06 whisper number. The stock is now trading just under $113 compared to just under $115 when I wrote this article so any potential buyer of the stock would have done well to heed my advice and wait until after the announcement to buy shares (Note: a day later fell to below $110).
The diagonal option spread that I suggested was sold in our Terry’s Tips portfolio for a credit of $.84. That meant for anyone buying 5 spreads, your investment would have been the $2500 maintenance requirement less $420 received from the sale, or $2080. Today we sold the spread for a debit of $.10, making $.74 per spread. After paying commissions of $25, the net gain on 5 spreads was $345, or 16.6% on the investment. This was the 11th consecutive successful earnings trade we have made using our Expectation Model.
Note: In the actual Terry’s Tips portfolio where the Costco trade was made, we also placed a calendar spread to reduce our risk (in case we were wrong about Costco falling after the announcement). This spread lost money and reduced our gain to 9.6% after commissions.
In JOY there were 4 July-13 – May5-13 calendar spreads. In our actual account at thinkorswim, here are the numbers for what we paid for these spreads and what we sold them for: 52.5 strike (cost $1.35 sold for $1.20), 55 strike (cost $1.55 sold for $2.38), 57.5 strike (cost $1.50 sold for $1.61), and 60 strike (cost $1.19 sold for $1.00). We lost money on 2 spreads but gained on 2 others, and enjoyed one big gain. The total cost of our investment was $2236 and our net gain after paying $65 in commissions was $175, or 7.8% on our investment.
While this was quite a bit lower than the returns we made on the earlier 11 investments that resulted in gains averaging about 19% (without a single loss), most people would be happy with 7.8% for a single week after commissions.
These two profitable earnings trades made it 12 consecutive gainers for this portfolio.
The odds of making 12 successful profitable trades without a single loss is comparable to flipping a coin and getting heads 12 times in a row. The odds of that happening are one out of 4096 times. Either I have been incredibly lucky or maybe there is some merit in the Expectations Model I have developed. The future will tell.
We are not making any earnings-related trades this week because only one company we are following (they must have weekly options and be trading over $20) reports this week, and our expectations model could not determine whether expectations were unusually high or low.
Follow Terry's Tips on Twitter
Like Terry's Tips on Facebook
Watch Terry's Tips on YouTube