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In my last three blog posts, I listed some stocks which I would be willing to go long by selling the puts right before the stock reported earnings. Keep in mind, these were companies which I believed would have a positive reaction to the earnings. However, if the stock moved sideways on the number. this strategy would still likely return a gain the following day. This is because I am taking advantage of the increased levels of implied volatility factored into the option premium before earnings.

If you missed them, be sure to check out my October 19 blog post here, October 21 blog post here and my October 26 blog post here. So far this earnings season, the overall results have been very positive, even on eBay (EBAY), which sold off nearly 10% after earnings. I was able to purchase back the put options (closed the position) for a $4 per contract gain the following day. The best results are of course when the stock has a very positive reaction to the report and pops.

Below is a summary of my best trades so far this earnings season. These companies and trades were pulled from the three blog posts indicated above.

  • Google (GOOG) (Very nice gain, with the following day being expiration)
  • Apple (AAPL) (We all remember the very nice pop Apple experienced the following day, the puts were closed and the calls used as a base in a call spread position)
  • Caterpillar (CAT) (Both closed at market open as CAT set a 52 week high)
  • Texas Instruments (TXN) (Closed put side at market open for pennies a share)
  • SanDisk (SNDK) (Was not expecting that move, closed both sides at market open which was too early, but a gain never hurt anyone!)
  • Walter Energy (Stock didn't move too much after earnings, closed for moderate gain)
  • Yahoo! (YHOO) (Closed at market open for less than 5% of the premium received)
  • Amazon (AMZN) (My best trade so far this earnings season, puts were closed for $2 per contract, less than 2% of the premium received, and as we all know Amazon skyrocketed, causing the call side to explode. I closed 80% of the call position the following day for more than a 1200% gain, and the remaining 20% the day after that for more than a 1900% gain.
  • Microsoft (MSFT) (Was really a risk free trade in my opinion considering Windows 7 was being released within days of this report)
  • Buffalo Wild Wings (BWLD) (Even on weakness in the underlying, the puts experienced tremendous volatility collapse which resulted in a net gain)
  • Visa (V) (Did not close the position as I am very bullish still on this name)
  • Norfolk Southern (NSC) (The stock didn't move too much in either direction, but both puts and calls collapsed by about 40% the following day. I would have held until expiration if it wasn't for Mr. Buffett sending shares higher when he purchased Burlington Northern (BNI)

Most of the put options sold on the stocks above were quickly closed within two hours after market open following the earnings report (some for as low as $1 per option contract). In most of the cases, the call options purchased were also sold the following day, but I continue to hold several, such as the Apple, Buffalo Wild Wings, Google, and Visa call options.

As the bulk of the earnings have been reported, this post will only contain four stocks to use this strategy on. I expect to use this strategy on all four of these stocks listed.

To reiterate my previous blog posts:

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 Monday. To understand the table below read the example used with Quicksilver Resources (KWK). All data as of market close Thursday November 5, 2009.

With Quicksilver (KWK) reporting before the bell Monday, Friday may be a good day to sell put options as implied volatility will likely soar before the earnings release.

For example, let's say I'm willing to purchase Quicksilver's stock at 8.1% less than its current share price. I would look to sell the November 12.50 strike Put options, and with the money received would look to purchase November 15 strike call options. Opening this position would put $25 in my portfolio. If Quicksilver expires between 12.50 and 15 a share at November expiration, this position would return $25 or 2% in two weeks taking into account the maintenance requirement for selling the put (Note: I always close the put side of my positions ASAP and do not wait for expiration, depending on where I believe the stock could trade from there will determine if I close the call side as well.) However, if Quicksilver can get and close above 15 at November options expiration, this position has the potential to return even more. The break-even for this position is Quicksilver at 12.25 a share at expiration; anything less would result in an unrealized loss on 100 shares of Quicksilver stock. I would also look to purchase call options on the December 16 (instead of the November 15), as they have more time value and do not have the same high levels of the implied volatility factored into the option premiums (they can be opened for roughly the same as the November 15 calls).

According to Google Finance, Quicksilver is the only stock of these four that reports earnings before the bell. Therefore the only chance to open this position would be Friday, The theta value from this position will be in your favor as the put side theta is greater than the call side theta. This is the rate of decay for the option (holding everything else constant) - theta is your friend when you're the seller, and your enemy when you're the buyer. I usually like to open the calls and puts simultaneously, however in the case of the three stocks below which report earnings after the bell Monday, I would look to sell the puts Friday and purchase the calls Monday. If the stock does not spike on Monday before the call option(s) are purchased, this will likely result in opening the position for cheaper, therefore putting even a greater amount of money in your portfolio. Again, taking advantage of the option decaying slightly over the weekend.

Company Ticker Put Call Net
Quicksilver Resources KWK 12.5 15 $25
Perfect World PWRD 40 55 $40
Priceline.com PCLN 150 190 $100
Rackspace Holdings RAX 17.5 20 $45

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. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

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 five 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 Calls, BWLD December 50 Call Options, GOOG LEAP Call Options, V November 60 Call Options, V December 80 Call Options, Short: GOOG November 580 Call Options, V November 70 Put Options, V November 80 Call Options

Source: 4 Earnings Season Option Strategies