For those who haven't read my articles before, once a week I publish one of these earnings articles on my upcoming trades in which I see a lot of potential. My philosophy is centered around limiting risk by using a strangle option strategy, which entails buying both call and put options that are out-of-the-money, but not too far out. The past few weeks there have been some very nice winners, such as Netflix (NASDAQ:NFLX), Akamai (NASDAQ:AKAM), Mastercard (NYSE:MA) (if you sold it early on the day the company reported earnings), and more. Along the way, some trades have worked out great and usually made for very quick exits. Others may take a while to profit, but that's what happens when trading earnings sometimes.
I am not a big believer in taking one side of a trade. If a trader decides to go only bullish or bearish on a trade, eventually they are going to get stung by playing only one direction. My trades focus on stocks that have a history of making large moves after reporting their earnings, regardless of the direction.
So far this week, we've already seen my recommendations from last week's article such as BroadSoft (NASDAQ:BSFT), Fossil (NASDAQ:FOSL), Ralph Lauren (NYSE:RL), and (NASDAQ:GMCR) report earnings. It's been a mixed bag as far as results, but it looks like most will be just fine. BSFT had a wild day trading on Monday, with its price all over the place. As of this writing on Wednesday, BSFT has fallen about 5.5% from Tuesday's closing price. I am still very confident on the put side of this trade, and recommend holding any contracts you may have.
FOSL had a similar type of day on Tuesday. It fell early, only to rise as the day went on. FOSL was down on Wednesday by over 4.4%, however.
RL was down over $12.00 at one point on Wednesday after reporting earnings before the market opened, and Green Mountain Coffee Roasters (GMCR) is getting absolutely crushed after-hours on Wednesday after a major miss on its earnings report.
As previous readers of my articles know, I always like to go out one month forward on my option contracts for the simple reason that it's always good to have time on your side. When purchasing options that are set to expire soon, you are really taking on a big risk that the trade will work out immediately for you. This isn't always the case, unfortunately. My recommendations will give you plenty of time for the stock to move and profit, even if there isn't the large move that was expected post-earnings. Most of the time, you should do well very quickly.
An example of this is if you would buy November 2011 options instead of December 2011 options. The November 2011 contracts and strike prices would be very hard to profit from quickly because of decreasing time value and implied volatility. Anything less than a major price swing will leave you with a loss.
Of course, if you make a lot of money on the trade quickly, then please sell the profitable side. I hear about and receive many e-mails and comments from others who have held on way too long on a profitable trade, only to see the stock reverse course. What was once a winning trade becomes a losing one rather quickly sometimes when this happens. That's not a good feeling.
Please read my previous articles on Seeking Alpha about my past earnings trades and strategy right here and here. There is a lot of good information and many questions that I answer in regards to my trading in the comment section. I highly recommend you check those out to get a better feel for my style of trading.
As I always mention in my earnings articles, and at the time of this writing, the stocks mentioned and recommended may have large price moves ahead of their earnings release. There will be times where you may have to change the strike prices to coincide with the change in the underlying stock price. Often, you will be able to profit on the trade even before the earnings are reported, which is always a good thing. Whether you want to sell or roll the options and simply take that early profit or hold onto the contracts through the earnings is entirely up to you.
Now let's get into next week's earnings trades and what I'm currently looking at:
Monday, November 14, 2011
Zagg Inc. (NASDAQ:ZAGG) - is scheduled to report its earnings after the market closes on Monday.
ZAGG designs, manufactures, and distributes protective coverings, audio accessories, and power solutions for consumer electronics and hand-held devices under the invisibleSHIELD, ZAGGskins, ZAGGbuds, ZAGGsparq, and ZAGGmate brand names. Out of all of Monday's earnings, ZAGG is the only company I am even considering placing a trade on.
Currently, ZAGG is trading at $11.78/share. The 52-week range is $6.23 - $17.10.
|Market Cap:||347.94 M|
ZAGG is an interesting play here. First, I feel that the December 2011 strike prices are going for a good price right now. You can place on a strangle trade (which involves buying both out-of-the-money call and put options) with not too much of an upfront investment. ZAGG has moved a lot before, both pre-earnings and post-earnings.
Here is a closer look at ZAGG's last two earnings releases and the type of movement it had on August 15, 2011.
|Aug 17, 2011||15.40||15.75||14.90||15.02||1,078,665|
|Aug 16, 2011||15.50||15.95||14.87||15.16||1,794,561|
|Aug 15, 2011||16.50||17.10||15.32||15.67||5,869,821|
|Aug 12, 2011||14.48||15.00||14.40||14.73||1,480,904|
This release had some strange movement going on pre-earnings. It went from a low of $14.40 on the Friday before the company reported, then to a high of $17.10 on the day it reported. This was an 18.7% move upward. I can see a similar type of scenario happening again this quarter pre-earnings.
On May 10, 2011, ZAGG reported earnings and had the following price movement:
|May 12, 2011||10.08||10.20||10.00||10.05||1,596,460|
|May 11, 2011||10.28||10.59||9.80||10.20||4,650,288|
|May 10, 2011||9.56||9.60||9.01||9.55||1,621,046|
|May 9, 2011||9.25||9.54||9.17||9.42||1,392,971|
Once again, there was a very large move for ZAGG. From a low of $9.17 on May 9, 2011 to a high of $10.59 on the day after the earnings were released, this made for a 15.4% increase in price.
This chart shows ZAGG's previous earnings-per-share (EPS) results and their future estimates:
At the time of writing, I am looking at purchasing the December 2011 $13.00 strike call options, along with December 2011 $10.00 puts. This can obviously change in the event of a huge price change in the underlying stock. The current bid/ask price spread to place the trade seems very reasonable. If you feel there will be a bigger move than normal, you can increase the call strike price and decrease the put strike to lower your upfront cost.
Tuesday, November 15, 2011-- No trades
Wednesday, November 16, 2011
1.) E-Commerce China Dangdang Inc. (NYSE:DANG) - is scheduled to report earnings before the market opens on Wednesday.
DANG operates as a business-to-consumer e-commerce company in the People's Republic of China. It engages in the sales of Chinese and foreign language books, music CDs, VCDs, and DVDs through its Website dangdang.com.
DANG is currently trading at $5.70/share. The 52-week range is $4.50 - $36.40
|Market Cap:||451.14 M|
This can potentially be a very profitable trade if you play it right. DANG has seen some wild price swings since it became publically traded in December 2010. Just look at the 52-week price range. What I would recommend doing is limiting your investment. Let's take a look at how DANG has moved pre-earnings and post-report.
On August 16, 2011 DANG reported its second quarter earnings. Here's how it moved:
|Aug 18, 2011||8.08||8.40||7.87||8.10||3,000,327|
|Aug 17, 2011||9.21||9.21||8.36||8.41||4,664,340|
|Aug 16, 2011||9.60||9.60||8.51||9.04||5,724,882|
|Aug 15, 2011||10.16||10.68||10.10||10.51||3,402,252|
This was quite a move-- from a high of $10.68 on August 15th to a low of $8.36, this represented a 21.7% slide in price. If you decided to hold on for an extra day, it would fall even further, to $7.87/share.
On May 20, 2011,DANG reported first quarter earnings. Here is the price move for that release:
|May 20, 2011||20.95||22.45||20.69||21.07||4,980,752|
|May 19, 2011||20.79||21.10||20.10||20.27||2,271,214|
While not as big of a move as the second quarter release, I still consider it worth a trade. From a low of $20.10 on the day before earnings were released to a high of $22.45 on the day it reported, this represented a 11.6% rise in the stock price.
With DANG's current share price very low right now, the December 2011 call options can be bought for a decent price. My recommendation as of this writing is to purchase December 2011 call options with a $7.00 strike price. To complete the strangle position, I also will be looking to buy the December 2011 $5.00 strike put options.
This trade can be put on for relatively cheap. It is going to move big one way or another. It is also important to note that DANG is a Chinese stock. There have been inquiries into many of the company's accounting practices as of late. In my view, this actually makes the trade more than likely of capturing a nice profit. I don't think there will need to be any adjusting of strike prices pre-earnings.
You may want to hold onto the trade longer than normal here as past performance by DANG post-earnings has still moved quite a bit. Don't get greedy, however. If the trade makes you money immediately, I would recommend selling the positions.
2.) NetApp, Inc. (NASDAQ:NTAP) - is scheduled to report earnings after the market closes on Wednesday.
NTAP engages in the design, manufacturing, marketing, and technical support of networked storage solutions. It supplies enterprise storage and data management software, and hardware products and services.
Currently, NTAP is trading at $42.03/share. The 52-week range is $33.00 - $61.02.
|Market Cap:||15.48 B|
One of the first things that I noticed when looking at the price of options for NTAP was that they seem to be very fairly priced right now. I am confident there will be at least a $6.00 price move with this stock after reporting, after the market closes on Wednesday.
On August 17, 2011, NTAP released its first-quarter earnings. The stock saw a significant move as this chart shows.
|Aug 19, 2011||34.85||36.87||34.79||35.95||14,439,411|
|Aug 18, 2011||35.71||35.92||33.32||35.80||41,004,322|
|Aug 17, 2011||42.76||43.47||41.22||41.66||13,820,151|
|Aug 16, 2011||43.80||44.10||42.49||43.03||6,771,595|
From a high of $44.10 on the day before earnings to a low of $33.32 the day after earnings, this represented a 24.4% decrease in share price.
On May 25, 2011, NTAP reported its fourth-quarter earnings and its stock saw this movement:
|May 27, 2011||55.33||55.33||55.33||55.33||4,947,400|
|May 26, 2011||53.19||56.49||52.90||55.31||18,963,800|
|May 25, 2011||51.84||52.29||51.02||51.73||10,396,182|
|May 24, 2011||52.77||52.87||51.38||51.47||6,597,082|
This chart shows NTAP's previous earnings-per-share (EPS) results and their future estimates:
On May 24, 2011, the day before earnings were released, NTAP saw a low of $51.38. The day after reporting earnings, NTAP reached a high of $56.49-- a 9.9% increase in price.
While definitely not a very large move, this still could have made a nice trade. The trade I am currently looking at is the December 2011 call options with a $44.00 strike price. To complete the strangle, the December $40.00 put strike options seems very reasonable. This trade is bordering on a straddle instead of a strangle as both strike prices are currently only $2.00 off where NTAP is trading at now.
I'm not sure how much longer these call and put options are going to be trading at these prices. They seem like a very good deal right now. I would give serious consideration to opening this position relatively early, as the implied volatility will increase substantially leading up to the earnings release.
3.) The next stock I am going to mention is not one of my top picks, but you should definitely take a good look at it because it could see a very large price move after reporting earnings. I did not want to completely leave it out, much like my CME recommendation last week. The company is Youku.com Inc. (NYSE:YOKU)
YOKU operates as an Internet television company in the People's Republic of China. Its Internet television platform enables consumers to search, view, and share video content across various devices.
If you decide to initiate a position, please try to limit your total investment. YOKU has yet to turn a profit, but even the slightest bit of positive results could send this stock soaring. YOKU is currently trading at $19.35. The 52-week range is $13.76 - $69.95.
|Market Cap:||2.2 B|
A strangle strategy with December 2011 $23.00 strike calls and December 2011 $17.00 strike puts is what I would consider. Sina's (NASDAQ:SINA) earnings results on Wednesday don't bode well for (YOKU), so you may want to take a more bearish position than bullish.
Thursday, November 17th, 2011
1.) Salesforce.com (NYSE:CRM) is scheduled to report earnings after the market closes on Thursday.
CRM provides customer and collaboration relationship management (CRM) services to various businesses and industries worldwide. It also offers a technology platform for customers and developers to build and run business applications.
Currently, CRM is trading at $128.75/share. The 52-week range is $109.21 - $160.12.
|Market Cap:||17.45 B|
CRM has has made some nice trades for me in the past around its earnings release. Is CRM expensive? Yes-- the company has a price-to earnings (P/E) ratio of 628.05, and earnings-per-share (EPS) of only $0.21.
Its options aren't cheap, and you will have to pay to play, so to speak. Let's take a look at the company's last earnings call and see how the stock moved before and after reporting on August 18, 2011
|Aug 19, 2011||117.72||123.85||110.74||111.00||9,625,991|
|Aug 18, 2011||122.86||123.15||112.62||114.06||7,671,943|
|Aug 17, 2011||132.93||133.75||123.88||126.31||4,624,491|
This release had some wild swings. From a high of $133.75 on the day before earnings were released to a low of $110.74 one day after the release, this represented a 17.2% decline in share price. If this earnings call repeated this move, it would make a good trade. Let's take a look at the previous release.
On May 19, 2011, CRM released its first-quarter earnings and the stock saw this movement:
|May 20, 2011||145.24||149.72||142.50||146.61||10,552,639|
|May 19, 2011||135.88||137.43||133.55||135.81||4,273,858|
|May 18, 2011||130.19||134.88||130.10||134.25||2,619,921|
From a low of $130.10 on the day before earnings to a high of $149.72, this represented a 15% increase in share price.
Here is a look at CRM's past EPS numbers and future estimates:
The issue here is picking the right strike prices for a strangle trade that will work, but not cost you a bundle to place. Realistically, I am expecting a $15.00 or more move in either direction. You can still profit off this trade if you buy December 2011 $155.00 strike calls, along with $110.00 strike puts. If there is at least a $15.00 move from the current price, this would put one side of the trade near the money, which should more than compensate for the cost to place the trade.
This is definitely a stock that should see a lot of action pre-earnings, so you will have to keep an eye on it just in case you may need to adjust your strike price.
2.) Aruba Networks, Inc. (NASDAQ:ARUN) is scheduled to report earnings after the market closes on Thursday.
ARUN provides next-generation network access solutions for the mobile enterprises worldwide. Currently, ARUN is trading at $23.44/share. The 52-week range is $16.20 - $36.40.
|Market Cap:||2.48 B|
ARUN is also an interesting trade candidate. I am somewhat bullish on this stock long-term. Last quarter, the stock made a very nice move up and looked to be trending higher, but market conditions put a bit of a damper on it. However, as we all know, anything can happen after a company reports earnings, so I want to play both sides.
On August 25, 2011, ARUN reported its fourth-quarter earnings and the stock made a nice move. Here is a closer look:
|Aug 26, 2011||18.79||21.00||18.50||20.55||14,542,346|
|Aug 25, 2011||17.64||18.16||17.03||17.14||5,392,430|
|Aug 24, 2011||17.76||17.99||17.03||17.79||3,633,882|
From a low of $17.03/share on the day before its earnings were released to a high of $21.00/share one day after reporting, this represented a 23.3% price increase. Very nice, indeed.
On May 19, 2011, ARUN reported its third quarter earnings and saw this price move:
|May 20, 2011||31.00||31.17||26.98||27.10||19,340,053|
|May 19, 2011||33.34||33.73||32.50||32.69||4,255,285|
|May 18, 2011||31.19||32.50||31.01||32.50||2,581,511|
From a high of $32.50/share on the day before its earnings were released to a low of $26.98 one day after the release, this represented a 16.9% decrease in price.
Here is a closer look at ARUN's past EPS numbers and future estimates:
As I stated earlier, I am more bullish on ARUN going forward. Looking at the strike prices, the December 2011 $25.00 calls look very enticing and reasonably priced. For some protection, however, the December 2011 $21.00 strike puts seem like a good spot to have in case of an earnings miss. Once again, the price of ARUN can change in the coming days and into next week, so be sure to change any strike prices according to what the underlying stock is doing. It's never a bad idea to sell a profitable side of the trade and re-enter if that happens, either.
Friday, November 18, 2011- No trades
That wraps it up for next week's trades. if you have any questions you can leave one in the comment section or e-mail. I try to respond as quickly as possible.
Additional disclosure: I will be initiating a strangle option strategy on the stocks mentioned in this article. I am also holding some options from last weeks earnings.