As earnings season is winding down, the really good opportunities become harder to find. Last week we saw Perfect World (PWRD), Collective Brands (PSS), Dycom Industries (DY), and TIVo (TIVO) report. PWRD and PSS are already in-the-money. As I always state in my articles, the time to buy the strangle is very important. Many time when you buy early there is a good chance you will be able to sell the position even before the earnings are released. It is ultimately up to the individual to decide if they want to hold the trade through earnings or sell before then and take profits.
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. There will of course be times when the trade will take more time than expected.
The December 2011 options will be expiring in about three weeks, so please but be aware that the loss of time value can seriously dampen profit potential. In this article I will point out in each trade what strikes I like and what i consider a fair price.
Here's what's on tap for the week of November 28, 2011:
Monday, November 28th - No Trades
Tuesday, November 29th
Tiffany & Co. (TIF) - is scheduled to report earnings before the market opens on Tuesday.
TIF engages in the design, manufacture, and retail of fine jewelry worldwide. Its jewelry products include fine and solitaire jewelry; diamond engagement rings and wedding bands for brides and grooms.
TIF is currently trading at $71.96/share. The 52-week range is $54.58 - $84.49.
|Market Cap:||9.16 B|
With this trade, there is a bit of a dilemma. First, the January 2012 options are extremely expensive. I just don't feel very comfortable with the price of both the call and put options. My thinking here is to buy December 2011 strikes, but have them closer to at-the-money strikes.
In the past, TIF has popped before and could do it again. I don't want to leave it out entirely. Let's look at their past performance before and after releasing earnings.
On August 26, 2011, TIF reported their second-quarter earnings and the stock saw this move:
|Aug 29, 2011||70.05||71.63||69.50||71.52||3,262,665|
|Aug 26, 2011||66.89||69.50||65.63||69.01||7,575,727|
|Aug 25, 2011||65.09||67.34||62.70||63.11||3,338,486|
From a low of $62.70 on the day before releasing their earnings to a high of $71.63 one day following the release, this represented a 8.39% price increase. It should be noted that TIF went above $73.00/share in the following days after August 29, 2011.
On May 26, 2011, TIF released their first-quarter earnings. Here is how the stock price fared:
|May 27, 2011||76.50||76.50||76.50||76.50||1,951,300|
|May 26, 2011||73.17||76.88||73.17||76.04||7,945,932|
|May 25, 2011||68.13||70.39||67.57||70.04||2,400,726|
From a low of $67.57/share on the day before earnings to a high of $76.50 the day following earnings, this represented a 13.2% increase in price.
On March 21, 2011, TIF reported their fourth-quarter earnings. The stock had the following price move:
|Mar 23, 2011||59.30||59.95||57.90||59.37||2,174,293|
|Mar 22, 2011||60.00||60.22||59.24||59.49||2,719,763|
|Mar 21, 2011||61.62||62.28||59.73||60.22||6,566,377|
From a high of $62.28 on the day before earnings to a low of $57.90 one day after, this represented a 7.3% decrease in share price. Nothing special here.
On November 10, 2010 TIF released their third-quarter earnings. The stock had this price move before and after the release:
|Nov 26, 2010||61.16||61.19||60.31||60.60||1,581,138|
|Nov 24, 2010||61.33||61.33||61.33||61.33||6,792,200|
|Nov 23, 2010||58.50||59.03||57.25||58.27||4,595,737|
From a low of $57.25/share the day before earnings to a high of $61.19/share the day after earnings, this represented a 3.94% increase in share price. This was underwhelming.
For three out of the last four quarters, TIF has seen its stock price rise after earnings.
I will buy January 2012 $75.00 strike call options and January 2012 $67.50 strike put options. If you decide to make this trade, I would do it rather soon. Currently, the bid/ask spread is $7.35-$7.50. This is not a cheap trade to place, but this will give you plenty of time. It is too risky to play the December strikes with the expiration not too far away. TIF could really move here, however, and it must be considered as a trade candidate. I would really like to be able to place this trade at about $7.00. I would pay no more than $7.45 for it.
Zoltek Companies Inc. - is scheduled to report their earnings after the market closes on Tuesday.
ZOLT is an applied technology and advanced materials company that develops, manufactures, and markets carbon fibers and technical fibers. Its products include commercial carbon fibers, which are primarily used as a reinforcement material in composites.
ZOLT is currently trading at $6.02/share. The 52-week range is $5.60 - $16.06.
|Market Cap:||206.9 M|
ZOLT is definitely an under-the-radar type earnings trade. This stock has seen very large moves after reporting earnings on a consistent basis. Here is a look at their previous price moves before and after reporting earnings.
On August 9, 2011, ZOLT reported their third-quarter earnings and the stock had the following price move:
|Aug 11, 2011||7.01||7.69||6.61||7.47||663,908|
|Aug 10, 2011||8.67||8.67||6.90||6.91||649,004|
|Aug 9, 2011||8.15||8.51||7.65||8.43||405,856|
|Aug 8, 2011||8.40||8.40||7.79||7.88||721,028|
From a high of $8.40/share on the day before earnings to a low of $6.90 on the day after reporting, this represented a 17.8% decrease in price.
On May 5, 2011, ZOLT reported their second-quarter earnings. The stock had this movement:
|May 6, 2011||11.91||11.91||10.12||10.80||931,202|
|May 5, 2011||11.75||12.01||11.58||11.71||154,626|
|May 4, 2011||12.15||12.15||11.83||11.85||114,647|
From a high of $12.15/share on the day before earnings to a low of $10.12/share the day after reporting, this represented a 16.7% decrease in price.
On May 3, 2011, ZOLT reported their first-quarter earnings. The stock had this price movement:
|Feb 4, 2011||12.08||14.61||12.02||14.31||2,115,332|
|Feb 3, 2011||11.54||11.68||11.37||11.65||165,234|
|Feb 2, 2011||11.53||11.67||11.40||11.53||95,525|
From a low of $11.40/share on the day before earnings to a high of $14.61/share the day after reporting, this represented a 28.1% increase in price.
I am a bit more bullish on this stock. Here's how I think this trade can work out: purchase January 2012 $7.50 strike call options along with January 2012 $5.00 strike put options. The bid/ask spread is currently at 0.40-0.70. If you can buy this trade for around 0.55 (use a limit order) as a whole, there is really little downside to it. If the stock sees a large move, as it has done in the past, you could do very well.
ZOLT's 52-week range leans more to the bullish side and there is plenty of room to move up. If they miss, the put should make up for the loss on the call option side. This is a low-risk trade in my opinion.
Wednesday, November 30th
rue21, Inc. (RUE) - is scheduled to report their earnings after the market closes on Wednesday.
RUE operates as a specialty apparel retailer in the United States. It offers an assortment of fashion apparel and accessories for girls and guys, including graphic T-shirts, denim, dresses, shirts, hoodies, belts, jewelry, handbags, footwear, intimate apparel, and other accessories.
RUE is currently trading at $23.62/share. The 52-week range is $21.30 - $37.33
|Market Cap:||577.74 M|
I really like this trade. I believe there will be heavy price movement with this stock both before and after earnings. Here is how the stock has performed in the past.
On August 24, 2011, RUE reported their second-quarter earnings. The stock has the following move before and after reporting:
|Aug 26, 2011||24.71||25.02||23.70||24.58||741,097|
|Aug 25, 2011||22.00||25.72||22.00||23.88||2,488,504|
|Aug 24, 2011||26.25||27.85||25.12||26.97||653,276|
|Aug 23, 2011||25.03||26.74||24.38||26.33||355,347|
RUE had reached a high of $27.85/share on the day they were set to report after the market closes. At the open the next day, the stock opened at a low of $22.00/share. This represented a 21% decrease in price.
On May 26, 2011, RUE reported their first-quarter earnings. Here's how the stock moved:
|May 27, 2011||32.96||34.04||32.96||32.96||1,915,600|
|May 26, 2011||28.38||29.16||28.30||28.60||338,597|
|May 25, 2011||28.78||29.16||27.97||28.38||190,916|
From a low of 427.97/share the day before reporting their earnings to a high of $34.04/share the following day, this represented a 21.7% increase in price.
I am currently looking at the January 2012 $25.00 strike call options and the January 2012 $22.50 strike put options. The bid/ask spread is wide here at 2.70-3.80, but if you use a limit order and can get the order filled anywhere near $3.10, I think it represents a very good value. When you place an order and it doesn't get filled by an exchange after a while, cancel it, and then place another one. Usually it will get re-routed to another exchange and sooner or later one will fill the order. This is what I like to due when there is a large bid/ask spread.
Thursday, December 1st
Ulta Salon, Cosmetics and Fragrance Inc. (ULTA) - is scheduled to report earnings after the market closes on Thursday.
ULTA is a beauty retailer that provides prestige, mass, and salon products and salon services in the United States. Its stores offer approximately 21,000 beauty products in various categories, which include cosmetics, such as products for the face, eyes, cheeks, lips, and nails; haircare, including shampoos, conditioners, styling products, and hair accessories.
ULTA is currently trading at $66.49/share. The 52-week range is $32.01 - $75.69.
|Market Cap:||4.08 B|
I have hit on some nice winners with ULTA in the past. This stock usually makes very large moves post-earnings report. Let's see some of their past earnings movement.
On September 8, 2011 ULTA reported their second-quarter earnings. The stock saw the following price move before and after reporting:
|Sep 9, 2011||62.13||68.70||62.03||68.45||4,659,440|
|Sep 8, 2011||56.59||60.20||56.03||59.76||1,904,520|
|Sep 7, 2011||56.39||57.25||55.60||56.80||626,833|
From a low of $55.60/share on the day before reporting earnings to a high of $68.70/share the day after reporting, this represented a 23.5% increase in price.
On June 7, 2011, ULTA reported their fist-quarter earnings. Here was the price move then:
|Jun 9, 2011||55.94||57.25||55.19||57.05||1,179,728|
|Jun 8, 2011||56.33||56.83||53.10||55.90||3,945,236|
|Jun 7, 2011||49.99||50.50||49.34||49.61||1,416,755|
|Jun 6, 2011||51.34||52.10||49.60||49.70||843,149|
From a low of $49.60/share the day before reporting earnings to a high of $56.83/share the day after reporting, this represented a 14.5% increase in price.
On March 10, 2011, ULTA reported their first-quarter earnings. The stock had the following move:
|Mar 11, 2011||43.02||47.55||43.02||45.77||3,042,711|
|Mar 10, 2011||40.70||42.57||40.34||42.11||1,211,060|
|Mar 9, 2011||41.66||42.28||41.00||41.13||705,278|
From a low of $40.34/share the day of reporting their earnings to a high of $47.55/share the day after reporting earnings, this represented a 16.5 increase in price.
As you can see, ULTA tends to do well on earnings. The PPS has gained in each of the last three quarters. The one issue with ULTA is that the options aren't cheap. A big move is expected and they usually deliver. Overall, I am bullish on this stock and think it can run into the $80.00/share range. Still, we need to have a downside angle in play. My thinking here is that if it falls after earnings, it is going to be quick. The stock will probably regroup and move back up.
For a trade, I am currently looking at the January 2012 $65.00 strike calls. These are expensive at a current bid/ask price of $6.70-$ 7.10, but they are a little bit in-the-money already. As I stated above, if it should fall, it should be swift. The December 2011 $65.00 strike calls make sense. The current bid/ask on those is $3.20- $3.40. This position will take constant monitoring before and after earnings are announced.. I would hold onto the calls even if the stock drops post-report. There is a good chance you may be able to sell pre-report and make a decent, if not great, profit.
Friday, December 2, 2011- No trades
Additional disclosure: I currently have strangle positions in TIVO, DY,