In my blog post Monday I listed a few stocks which I would be willing to go long by selling the puts right before the stock reported earnings. If you missed it you can view the details here. As indicated I took positions on Apple (AAPL), Caterpillar (CAT), Texas Instruments (TXN), SanDisk (SNDK), Walter Energy (WLT), and Yahoo! (YHOO). The first three have been closed for quick profits (excluding the Apple calls), and I will look to close my positions on the latter three Wednesday Morning. In this post, I will lay out some trades for Thursday, Friday, and Monday (October: 22, 23, and 26).
To reiterate my previous blog post:
In this post, I will outline an option strategy that I use particularly during earnings season. This will put money in my pocket up front, give me a chance to purchase the stock for less than it's trading for now, and also give me gains if the stock moves even higher. I must note that this strategy could lose money if the stock moves much lower after results and you get the stock PUT to you at expiration (or in the rare case of an early exercise). This post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.
The table below shows some of the stocks I'm willing to go long (for reasons not discussed in this post), which will be reporting earnings in the three days mentioned above. To understand the table below read the example used with Baidu (BIDU).
After results from Google (GOOG) and Yahoo I am bullish on Baidu as well. With Baidu reporting after the bell Monday, it may be a great day to sell put options as implied volatility will likely soar before the earnings release. If you choose to open this position Friday versus Monday, I would recommend selling the put early-mid trading day, and purchasing the higher strike call within minutes of market close (as implied volatility will fall due to the weekend causing the options to be priced slightly cheaper).
For example, let's say I would be willing to purchase Baidu stock at 7% less than its current share price. I would look to sell the November 380 strike Put options, and with the money received would look to purchase November 450 strike call options. Opening this position would put $240 in my portfolio. If Baidu expires between 380 and 450 a share at November expiration, this position would return $240 (*NOTE* I always close my positions ASAP and do not wait for expiration). However, if Baidu can get and close above 450 at November options expiration, this position has the potential to return even more. The break-even for this position is Baidu at 377.60 a share at expiration; anything less would result in an unrealized loss on 100 shares of Baidu stock. I would also look to purchase call options on the December 470 (instead of the November 450), as they have more time value and do not have the same high levels of the implied volatility factored into the option premiums.
Note that the column labeled Put is the November Put Option I am looking to sell, the column labeled Call is the November Call Option I am looking to purchase with the premium received from selling the Put, and Net is the Net amount of cash I would receive (based on data as of market close Friday October 16, 2009). Also note it may be a good idea to choose a higher strike December dated option contract as stated in the Baidu example above.
|Chipotle Mexican Grill||(CMG)||80||100||$30|
|United Parcel Service||(UPS)||55||60||$25|
|Annaly Capital Management||(NLY)||17||18||$10|
This is a bullish strategy and should not be considered if you think the stock will sell off after earnings. However if you feel you've missed the stock and think it could move sideways or up after the report, this strategy could yield a nice gain.
The list above are stocks which I wouldn't mind holding in my portfolio if they get PUT to me at expiration. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.
I use this strategy to open long positions when the market has rallied as much as it has. This strategy will allow me to purchase stocks for less, as well as provide a return without the stock if the market continues to rally. The reason option volumes have surged in the last 5 years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.
Disclosure: Long AAPL December 200 Call Options, AXP, SNDK December 25 Call Options, YHOO December 20 Call Options, Short AXP November 33 Put Options, SNDK November 20 Put Options, WLT November 60 Put Options, YHOO November 16 Put Options