This article is the latest in my weekly strangle option trades that focus on profiting from earnings releases. The strangle option trade is a neutral strategy (no bullish or bearish bias) that involves buying out-of-the-money call options and buying out-of-the-money put options with the expectation that the stocks will make large enough moves to profit. The option contracts are purchased on an even basis. The initial upfront cost is much cheaper than the straddle. To have a better idea of how I trade earnings, I recommend that you read some of my previous related articles on Seeking Alpha here, here and here.
As with any trade, some will work out a lot better than others, so please check out my previous articles and you can make a decision if you want to use the strangle option strategy. I only choose stocks that have a history of making larger moves post-earnings report.
Often, I am asked how to spot a good price to pay for the trade when you see it. There are many factors that come into play here. From the time my article is written and published and up to the day of the earnings release, the price of the stocks mentioned here may have a drastic move from where it was at the time of this writing. This can clearly change where I would place the strike prices. Always keep this is mind, as you may need to adjust the strike prices.
With my 'strangle' trades, I always go at least one month forward with the options. Since it is November, I will only look at December or later expirations. While you will pay more upfront, these options will not deteriorate in value at the speed short-term contracts do. Please, do not purchase weekly options or soon-to-be expiring options with this strategy.
Let's get to the trades for the week of November 21. There are some very intriguing picks this week.
Monday, November 21, 2011
1.) Perfect World Co. Ltd. (PWRD) - is scheduled to report earnings after the market closes on Monday.
PWRD operates as an online game developer and operator in China, the United States, Japan, and southeast Asia. The company develops online games based on its proprietary game engines and development platforms.
Currently, PWRD is trading at $12.82/share at Tuesday's market close. The 52-week range is $10.70 - $29.10.
(Click charts to expand)
|Market Cap:||636.91 M|
On August 22, 2011, PWRD reported second-quarter earnings. There was a very large move in the stock price.
|Aug 24, 2011||21.76||22.10||20.97||21.28||1,046,171|
|Aug 23, 2011||21.20||22.66||20.82||21.43||3,547,448|
|Aug 22, 2011||19.00||19.01||18.01||18.59||960,784|
|Aug 19, 2011||17.31||19.02||17.31||18.37||1,369,166|
On the Friday before earnings were released , PWRD saw a low of $17.31/share. After reporting earnings after the market closed August 22, PWRD saw a high of $22.66/share the following day. This was a 30.96% increase in price.
On May 23, 2011, PWRD released first-quarter earnings. Here is the price movement pre-earnings release and post-earnings:
|May 24, 2011||25.65||27.10||25.62||26.29||2,208,458|
|May 23, 2011||23.75||24.04||23.13||23.95||1,000,905|
|May 20, 2011||24.01||24.19||23.75||23.98||292,535|
On the day of earnings, PWRD saw a low of $23.13. After reporting, the stock jumped to a high of $27.10 on May 24. This represented a 17.1% increase in price.
Here is a closer look at PWRD's past earnings-per-share (EPS) numbers and future estimates:
PWRD is trading at much lower than its 52-week high. I hold a little bit more of a bullish sentiment here, but also am aware that there is a possibility of more downside to the $10.00+/share level.
The trade I am looking at is a variation of the strangle. Instead of purchasing the same month expirations, I actually like the value of the March 2012 $14.00 strike calls. This stock can easily be trading well above this strike price by then no matter what happens right after the earnings report. The bid/ask spread is wide (currently at 0.95-1.45), so I would pay no more than $1.20 for it by using a limit order. On the put side of the trade, I currently like the December $12.00 puts. If you can get it for $0.70 or less, that is reasonable. In total, the trade should cost you less than $2.00 to fill. I would be cautious not to go too much above that.
If PWRD were to pop after earnings, those March 2012 $14.00 strikes should be worth much more than the cost of the trade. Plus, you will also have a lot of time-value left.
PWRD has a very low short-interest at 1.69%.
2.) Collective Brands, Inc. (PSS) - is scheduled to report earnings after the market closes on Monday.
PSS engages in the wholesale and retail of footwear and related accessories worldwide. Its Payless ShoeSource stores offer footwear, including athletic, casual and dress shoes, sandals, work and fashion boots, slippers, and accessories, such as handbags, jewelry, and hosiery for women, children and men.
Currently, PSS is trading at $14.07/share. The 52-week range is $9.11 - $23.96.
|Market Cap:||852.2 M|
On August 24, 2011, PSS released second-quarter earnings. The stock saw the following movement:
|Aug 26, 2011||12.05||13.00||11.81||12.70||5,086,072|
|Aug 25, 2011||13.11||13.33||11.94||12.19||11,815,813|
|Aug 24, 2011||9.91||10.74||9.79||10.28||5,009,170|
|Aug 23, 2011||9.50||10.05||9.30||10.02||2,723,532|
From a low of $9.30 on the day before earnings to a high of $13.33 the day after it reported, this represented a 43.3% increase in price.
Let's take a look at how the first-quarter earnings release on May 24, 2011 fared:
|May 26, 2011||15.32||15.46||15.05||15.27||3,316,953|
|May 25, 2011||15.70||16.20||15.25||15.31||10,067,218|
|May 24, 2011||18.23||18.62||18.04||18.37||2,841,340|
|May 23, 2011||18.15||18.73||18.02||18.10||1,825,068|
On May 23, 2011, the day before the earnings release, the PSS saw a high of $18.73/share. The day following the earnings release, May 25, saw the stock fall to a low of $15.25/share. This represented a 18.5% decrease in price.
Here is a closer look at PSS past earnings-per-share numbers and future estimates:
I have had a lot of success trading PSS with a strangle in the past. Currently, I am comfortable recommending a purchase of December 2011 $15.00 strike calls along with December 2011 $13.00 strike puts. At the time of this writing, the bid/ask spreads on both the calls and puts are evenly priced. If you can place this trade for $1.40 or less as a combination, that would be fair value.
PSS has a short-interest of a whopping 24.29% as of this writing. The short ratio is 7.24.
*3.) Hewlett-Packard Company (HPQ) - is scheduled to report earnings after the market closes on Monday.
The stock is currently trading at $28.24/share. The 52-week range is $21.50 - $49.39.
|Market Cap:||56.11 B|
Normally, I would never recommend HPQ as a strangle trade. However, this earnings release is a bit different. Everybody knows the disaster this company has become lately. The stock has actually rebounded quite well recently.
Here's how I am approaching this trade: I want to extremely limit my investment, so I am going to purchase deep-out-of-the-money call and put options. I really have no desire to put too much capital in this trade. However, it could make a nice profit.
I am going to buy December 2011 $34.00 strike calls for basically a minimal investment (0.12-0.14 is the current spread) and also purchase December 2011 $22.00 strike puts (curent spread is 0.18-0.20). This trade is one of those few that come around every once in a while where it is worth it to take a bit of a gamble on, without expecting too much at a very low cost. I won't be too surprised to see this trade make a decent profit.
Again, this is a one-time trade where the minimal amount invested is worth a shot.
Tuesday, November 22, 2011
1.) TiVo Inc. - is scheduled to report earnings after the market closes on Tuesday.
TIVO provides technology and services for television solutions, including digital video recorders (DVRs) and connected televisions in the United States and internationally.
TIVO is currently trading at $10.60/share. The 52-week range is $7.06 - $12.65.
|Market Cap:||1.28 B|
TIVO has been fairly consistent in getting a big price move after releasing earnings.
On August 24, 2011, TIVO reported second-quarter earnings and saw this price move just before and after the release:
|Aug 26, 2011||9.37||10.03||9.37||9.96||5,559,379|
|Aug 25, 2011||8.88||9.72||8.77||9.50||16,582,354|
|Aug 24, 2011||8.23||8.45||7.98||8.12||3,959,307|
|Aug 23, 2011||7.99||8.28||7.72||8.25||3,317,060|
From a low of $7.72 on the day before earnings to a high of $9.72 the day after they reported earnings, this represented a 25.9% price increase.
On May 24, 2011, TIVO had this movement for their first-quarter earnings:
|May 26, 2011||10.14||10.37||9.88||10.23||4,011,143|
|May 25, 2011||9.47||10.23||9.35||10.16||8,360,357|
|May 24, 2011||9.72||9.78||9.22||9.41||4,728,062|
|May 23, 2011||9.30||9.58||9.15||9.36||4,331,924|
While definitely not as significant a move as the report for August 24, it was still worth trading. From a low of $9.15/share on the day before earnings were released to a high of $10.23 one day after the release, this represented a 11.8% price increase.
Let's check one more release. On March 1, 2011, TIVO reported fourth-quarter earnings. Here is the price move:
|Mar 2, 2011||9.68||9.72||8.90||8.93||7,729,201|
|Mar 1, 2011||10.06||10.25||9.78||9.82||3,876,056|
|Feb 28, 2011||10.41||10.41||10.21||10.28||2,639,323|
From a high of $10.41 before earnings to a low of $8.90 the day after the release, this represented a 14.5% decrease in price.
Here is a closer look at TiVo and their past earnings-per-share numbers and future estimates:
With a strangle trade for TIVO, I think purchasing the December 2011 $11.00 calls and December 2011 $10.00 puts makes perfect sense. I really like the current price these can be bought for right now. If you can purchase the trade for $1.00 or less as a combination on the bid/ask, I would make that trade sooner rather than later.
TIVO has a short interest of 10.98%. The short ratio is 4.37.
2.) Dycom Industries Inc. (DY)
DY provides specialty contracting services in the United States and Canada. It offers engineering services, including the design of service area concept boxes, terminals, buried and aerial drops, transmission and central office equipment, administration of feeder and distribution cable pairs, and fiber cable routing and design for telephone companies.
DY is currently trading at $20.26. The 52-week range is $10.90 - $20.95.
|Market Cap:||678.54 M|
Last quarter, DY had a blowout earnings report on August 23, 2011 for the fourth quarter. The stock really took off as this chart shows:
|Aug 25, 2011||16.22||16.85||16.00||16.37||1,121,995|
|Aug 24, 2011||15.95||16.15||14.78||15.97||2,055,829|
|Aug 23, 2011||12.87||13.86||12.75||13.83||633,093|
|Aug 22, 2011||13.02||13.10||12.66||12.79||524,459|
From a low of $12.66/share on the day before it released earnings to a high of $16.15/share one day after the report, this represented a 27.5% increase in price.
On May 24, 2011, DY reported third-quarter earnings and the stock saw this movement:
|May 26, 2011||15.80||16.81||15.74||16.81||500,556|
|May 25, 2011||17.00||17.00||15.54||15.90||1,307,358|
|May 24, 2011||14.48||14.54||13.88||14.34||563,908|
|May 23, 2011||14.54||14.61||14.37||14.38||196,380|
From a low of $14.37/share on the day before it released earnings to a high of $17.00/share on the day following the reports, this represented a 18.3% increase in price.
Here is a closer look at DY and past earnings-per-share numbers and future estimates:
If there is one concern I have about DY and this earnings release, it is that the stock is very near its 52-week high. On the other hand, the stock could really break out.
I will be placing a strangle option on DY with December 2011 $22.50 strike calls and December $17.50 strike puts. The current combined bid/ask spread to place this trade is 0.75- 1.00. If you can place the trade for anything under $1.00 that would be ideal.
DY also has a relatively low short-interest of 5.57%. The short ratio is 3.94.
Wednesday, November 23, 2011 - Friday, November 25, 2011- No Trades
Unfortunately, earnings season is a bit light right now. There just aren't too many big names that move right now.There are already some stocks I see reporting for the week of November 28 that I like. Until then, good luck with your trades.
Disclosure: I have no positions in any stocks mentioned, but I will be initiating positions in the above mentioned stocks using a strangle options strategy.