For the week of December 5-9, 2011, there are a few compelling trades to use the 'strangle option' strategy with. Earnings season continues to be light until the beginning of 2012, but with this week's trades I noticed a few strike prices that were selling for what I would consider a good value right now.
The 'strangle' option strategy is when you purchase call and put options that are out-of-the-money, but with the same expiration date. The 'straddle' is when you buy the same expiration and the same strike price.
The December 2011 options will be expiring in about two weeks, so I will now have all strangle trades placed having a January 2012 expiration. In this article I will point out in each trade what strikes I like and what i consider a fair price.
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 and with large 52-week price ranges. There will be times when the trade will take more time than expected. This is also why I like to have at least the next month forward on my trades.
Here's what's on tap for next week:
Monday, December 5, 2011
G-III Apparel Group, LTD (GIII) - is scheduled to report earnings before the market opens on Monday. (Note: as of this writing, I have been on G-III's website, the investor relations page (it's horrible), and numerous other financial websites and the date of earnings is given as either 12/5 or 12/7. Until I get a more clear date, I will list it as happening on Monday.) I would monitor the situation. Also, GIII has traditionally released earnings after the market closes, but some are saying that this one is before the market opens. Keep an eye on that, as well.
GIII designs, manufactures, and markets various women's and men's apparels in the United States.
GIII is currently trading at $17.98./share. The 52-week range is $17.60 - $45.38.
|Market Cap:||357.6 M|
This is an interesting trade here. The stock has really moved in the past after reporting earnings. The past two months has also seen some insider purchasing of shares and also an announcement that the company would be repurchasing two million shares. It's something to keep in mind. Last quarter the company warned against a "weak" Q3, but almost in-line with estimates.
On September 7, 2011, GIII released its second-quarter earnings and the stock moved quite a bit, as seen here:
|Sep 9, 2011||23.70||23.99||22.30||22.58||481,117|
|Sep 8, 2011||24.26||25.20||23.10||23.82||1,426,081|
|Sep 7, 2011||26.71||28.77||26.32||28.66||190,761|
|Sep 6, 2011||25.63||26.25||25.11||26.15||122,998|
From a high of $28.77/share on the day it released earnings after the market closed to a low of $23.10/share the following day, this represented a 19.7% decrease in share price.
On June 6, 2011, GII released first-quarter earnings and the stock had the following price movement:
|Jun 8, 2011||34.29||34.58||33.08||33.42||355,441|
|Jun 7, 2011||35.00||35.25||31.85||33.98||1,459,836|
|Jun 6, 2011||38.71||39.33||38.23||38.47||255,801|
|Jun 3, 2011||39.50||39.83||38.46||38.60||192,298|
From a high of $39.83 on the day before earnings to a low of $31.85 on the day after reporting, this represented a 20% decrease in share price.
On March 22, 2011, GIII released fourth-quarter earnings. The move here was disappointing from a strangle trade standpoint, as seen here:
|Mar 24, 2011||34.61||34.68||33.34||34.06||248,919|
|Mar 23, 2011||36.50||36.60||34.15||34.39||439,479|
|Mar 22, 2011||34.39||35.44||34.33||35.44||156,972|
|Mar 21, 2011||34.70||34.94||34.23||34.42||176,216|
From a low of $34.23 on the day before earnings were released to a high of $36.60 on the day after, this represented a 6.9% increase in share price.
On December 8, 2011, GIII released third-quarter earnings. The stock saw this movement:
|Dec 9, 2010||31.90||34.74||31.67||33.86||683,375|
|Dec 8, 2010||31.25||31.75||28.49||31.61||867,099|
|Dec 7, 2010||30.37||31.11||30.15||30.90||567,497|
From a low of $30.15 on the day before earnings to a high of $34.74 on the day after releasing earnings, this represented a 15.2% increase in price. It is also worth noting that the stock moved all over the place preceding earnings and post-earnings.
GIII is tied in with a lot of professional sports teams. I am wondering how much of an effect the NBA lockout has had on its sales. This is something that I am sure will be brought up in its conference call. I am expecting a big move with GIII this quarter based on past performance and uncertainty. Last quarter, it did guide below estimates. If it beats this the stock can really see a nice move up. If sales have tumbled, I would not be surprised to see a major sell-off.
The options I am looking at for the strangle trade are the January 2012 $20.00 strike calls and the January 2012 $17.50 puts. The bid/ask spread is wide on these right now (calls 0.55 -1.15, and 1.25-1.80 for the puts) Always be sure to place a limit order when making the trade. A $2.40 combined order should get the trade filled.
Tuesday, December 6th, 2011
Autozone, Inc. (AZO) - is scheduled to report earnings before the market opens on Tuesday.
AZO engages in retailing and distributing automotive replacement parts and accessories. The company's stores offer various products for cars, sport utility vehicles, vans, and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories, and non-automotive products.
Currently, AZO is trading at $319.51/share. The 52-week range is $246.26 - $341.89.
|Market Cap:||12.74 B|
Whenever you see a stock that is trading over $300/share in this economic environment, it has to be looked at. While AZO has had some sub-par moves over the years, it has also seen a very large move after releasing earnings. Right now, I really like the price of the options and do not think they will stay at this price for too long.
There is plenty of room for this stock to tumble if it should miss EPS estimates or give future estimates lower than expected. AZO does look a bit "toppy" at this level, but it can go higher on a big earnings beat. The strangle trade does seem to perform much better on stocks that are over $100/share, and AZO is well above that price.
Let's see what the stock has done in the past. I am anticipating a larger move one way or another for this release.
On September 20, 2011, AZO released fourth-quarter earnings. The stock saw the following price move:
|Sep 22, 2011||317.87||320.37||311.72||316.13||713,177|
|Sep 21, 2011||327.29||329.00||322.59||322.79||449,147|
|Sep 20, 2011||329.68||332.95||325.91||327.75||858,154|
|Sep 19, 2011||329.31||333.99||329.00||331.95||733,368|
From a high of $333.99 on the day before releasing earnings to a low of $322.59 on the day after reporting, this represented a 3.4% decline in share price. However, look what happened on September 22nd. The stock dropped to an even lower $311.72/share.
On May 24, 2011, AZO released third-quarter earnings. The stock saw the following price move:
|May 26, 2011||297.98||298.47||296.00||296.61||540,082|
|May 25, 2011||294.44||298.00||293.00||297.98||607,334|
|May 24, 2011||288.07||295.17||286.80||293.30||1,153,910|
|May 23, 2011||276.29||277.61||273.18||276.78||473,351|
From a low of $273.18 on the day before earnings to a high of $298.00 on the day after releasing earnings, this represented a 9% increase in share price.
On March 1, 2011, AZO released second-quarter earnings. The stock saw the following price move:
|Mar 2, 2011||263.74||264.54||260.68||262.84||564,686|
|Mar 1, 2011||265.54||267.98||260.21||263.52||1,016,898|
|Feb 28, 2011||255.51||260.00||255.45||257.95||526,276|
From a low of $255.45 on the day before earnings were released to a high of $264.54 on the day after the company reported, this was a 3.5% increase in share price.
On December 7, 2010, AZO reported first-quarter earnings. The stock saw the following price move:
|Dec 8, 2010||260.49||263.26||259.40||262.57||521,579|
|Dec 7, 2010||270.31||271.27||255.94||260.15||1,554,058|
|Dec 6, 2010||265.99||266.25||261.77||261.91||751,364|
From a low of $261.77 on the day before earnings were released to a high of $271.27 on the morning of the day of the release before the market opened, this represented a 3.6% increase in share price. The stock really wavered all over the place on this release.
For this upcoming release, I do feel there will be a larger move than what is expected based on the current options prices. I really want to minimize my investment in this trade while still having a very good chance at making a profit playing both sides here with call and put options. I am not expecting the stock to reach the strike prices I purchase (although that would be great), but move just enough to have the calls or puts rise in value enough to make the trade worthwhile.
I will be purchasing January 2012 $350.00 strike call options and January 2012 $280.00 put options. The current bid/ask spread to place this trade together is $4.35- $5.10. As I mentioned earlier, I do not see these options staying at this level for very long. I would be willing to pay anything less than $5.00 to place the trade. There is also a possibility that the trade will make a profit for you even before the earnings are even released next week. If that happens you can choose to close the position or stay with the trade through earnings.
Wednesday, December 7, 2011 - No trades
Thursday, December 8, 2011
Ciena Corp. (CIEN) - is scheduled to report earnings before the market opens on Thursday.
CIEN provides communications networking equipment, software, and services that support the transport, switching, aggregation, and management of voice, video and data traffic.
CIEN in the past has seen large and consistent moves after reporting earnings. The options prices to place the trade are reasonable right now, but they do have a tendency to spike up before earnings. Let's take a look at some previous movement with the stock around earnings.
On September 1, 2011, CIEN reported third-quarter earnings and the stock saw the following move:
|Sep 2, 2011||13.78||13.78||13.78||13.78||14,342,100|
|Sep 1, 2011||13.86||14.89||13.65||14.71||29,789,153|
|Aug 31, 2011||12.85||12.89||12.03||12.24||11,795,102|
From a low of $12.03 on the day before earnings were released to a high of $14.89 on the day of reporting earnings before the market opened, this represented a 23.7% increase in share price.
On June 8, 2011, CIEN reported second-quarter earnings. The stock saw the following move:
|Jun 10, 2011||18.82||19.47||18.80||19.04||9,414,855|
|Jun 9, 2011||20.40||20.40||19.00||19.00||19,659,039|
|Jun 8, 2011||21.06||21.60||19.72||20.29||36,582,779|
|Jun 7, 2011||24.29||24.61||23.90||24.21||5,405,384|
From a high of $24.61 on the day before earnings to a low of $19.00 on the day after earnings, this represented a 22.7% decrease in share price.
On march 7, 2011, CIEN reported first-quarter earnings. The stock saw the following price move:
|Mar 8, 2011||26.39||26.39||25.32||25.68||8,859,129|
|Mar 7, 2011||27.60||28.38||24.99||25.98||24,405,189|
|Mar 4, 2011||28.78||29.24||28.12||28.81||7,156,624|
From a high of $29.24 on the Friday before reporting earnings (due on Monday) to a low of $24.99 on the day it reported, this represented a 14.5% decrease in share price.
On December 9, 2010, CIEN reported fourth-quarter earnings. The stock saw the following move:
|Dec 10, 2010||18.30||19.25||18.30||19.21||12,197,423|
|Dec 9, 2010||17.41||18.38||17.34||18.36||19,532,935|
|Dec 8, 2010||15.81||16.05||15.70||15.92||4,834,356|
From a low of $15.70 on the day before earnings to a high of $19.25 on the day after it reported, this represented a 22.6% increase in share price.
As you can see, CIEN rarely fails to deliver a big move after reporting earnings. I really like this trade. The large 52-week range should serve the 'strangle' strategy well here. There is also heavy volume on the stock before and after reporting.
As for the strike prices, I will be purchasing January 2012 $12.50 strike call options and January 2012 $11.00 strike put options. The current bid/ask spread to place the trade is $1.93-1.98.
Friday, November 9, 2011 - No Trades
Disclosure: I am long AZO and will be initiating an options strangle with the others mentioned in this article this week.