A $20,000 Options Portfolio To Trade Earnings: Week Of Jan. 3

by: Kevin M. O'Brien

Starting In January, I will be writing a weekly article with earnings trades that I will be making. Instead of a hypothetical portfolio, these will be trades for which I am using my actual money.

For those who have never read any of my previous articles on Seeking Alpha, I consider myself a neutral options trader around earnings releases. From years of experience, I have found that taking only one side of a trade (calls or puts) is a very dangerous way to benefit using options. While the reward may be greater when you are right (if the stock moves in the desired direction), if you are wrong this can lead to catastrophic losses. That is simply not the way I like to trade.

For the first week of January, I will only be placing two trades. As earnings season picks up in the second week, I will be using the remaining amount in the portfolio. I also want to provide a preview of upcoming stocks I will be trading as we head into January.

Among the strategies that I will be using for this portfolio are the "straddle" and "strangle," along with the so-called "reverse iron condor" spread. The choice of which strategy I will use for each particular stock will be based on the expected price move, expiration date, cost, and potential profit. I will outline each trade before placing it, and then provide the results the following week.

For example, I will use a strangle strategy with a stock such as Google (NASDAQ:GOOG), even though I may also use the reverse iron condor as well. With a stock like Potash (NYSE:POT), I would be more inclined to use only a reverse iron condor spread, as Potash does not get the large price moves that Google does post-report. Depending on the circumstances, there will be times where I will place the trade early if I see value. These are just some hypothetical reasoning behind my trades.

Earnings season will really be picking up in January 2012, and I already have my sights on some trades I feel will be very profitable. When I hold a strong conviction on a specific trade, I am not at all afraid to invest heavily if the profit is worth the risk. This may include going "all in" on one trade for a particular week if necessary. However, If a certain week does not look very promising, I will choose to leave my funds on the sideline.

The expiration dates for each trade will vary depending on the strategy, circumstance, cost, and profit potential. The holding period for each trade and decision to close the position will also be based on these factors, which I will continually update on my InstaBlog and the following week's article.

My choice of using a $20,000 portfolio is based on experience and what I view as a reasonable amount to start with. This portfolio is what I will be trading. However, I may use more contracts and more capital as separate trades independent from this portfolio, but never less.

Starting in January 2012, the following companies are scheduled to report earnings. Here are those which I plan to trade:

  • The Mosaic Company (NYSE:MOS)
  • Monsanto Co. (NYSE:MON)
  • Apple Inc (NASDAQ:AAPL)
  • Google (GOOG)
  • International Business machines (NYSE:IBM)
  • Amazon.com (NASDAQ:AMZN)
  • F5 Networks (NASDAQ:FFIV)
  • Netflix (NASDAQ:NFLX)
  • Alcoa (NYSE:AA)
  • JPMorgan Chase (NYSE:JPM)
  • Citigroup (NYSE:C)
  • Cree Inc. (NASDAQ:CREE)
  • Goldman Sachs (NYSE:GS)
  • Groupon (NASDAQ:GRPN)
  • Intel Corporation (NASDAQ:INTC)
  • Frerport McMoRan Copper (NYSE:FCX)
  • Potash Corp (POT)
  • Wells Fargo & Co. (NYSE:WFC)
  • Intuitive Surgical (NASDAQ:ISRG)
  • eBay Inc. (NASDAQ:EBAY)
  • and more

Outlining Strategies

With stocks that have proven to make large moves post-earnings report, I am more inclined to use a straddle or strangle strategy. The straddle is a strategy that has the following set-up (using only one contract for explanation purposes):

Long Straddle Construction - same expiration.

  • Buy 1 ATM Call
  • Buy 1 ATM Put

The strangle is a strategy that has the following set-up (using only one contract for explanation purposes):

Long Strangle Construction - same expiration.

  • Buy 1 OTM Call
  • Buy 1 OTM Put

Another strategy that I use very effectively is the reverse iron condor spread. I have written a couple of articles on Seeking Alpha recently about this strategy.

The reverse iron condor has four "legs" to the trade. To place is accurately, it will have the following set-up (using only one contract for explanation purposes):

Reverse Iron Condor Construction - same expiration.

  • Buy 1 OTM Put
  • Sell 1 OTM Put (Lower Strike)
  • Buy 1 OTM Call
  • Sell 1 OTM Call (Higher Strike)

The reverse iron condor is a great trade when you expect a moderate, but not massive, move in the underlying stock. Both of the above examples that I wrote about and traded, Oracle and Research In Motion, worked absolutely great. They usually do when you pick the right stocks to use. I have found that the reverse iron condor is used most effectively with stocks that are reporting earnings during a specific week, but also have weekly options available. Occasionally, I will use a longer-term expiration (such as the Mosaic trade I will detail later in this article) on certain stocks.

The reverse iron condor is a neutral strategy that is placed with a net debit to the buyer. It is a limited risk, limited profit trade, but it can also be used as a hedge with a straddle or strangle if the stock only has a marginal move after reporting earnings. The straddle and strangle trade requires a large move post-report and is much riskier than the reverse iron condor strategy.

I will often only use a reverse iron condor as a trade when I have concerns that the stock will not move enough to justify placing another type of strategy. If you are content going into a trade knowing what kind of profit you stand to make ahead of time (without worrying too much about how much a stock has to move), or how market makers effect the wide bid/ask spreads post-release, implied volatility, and the eventual selling of your trade for the best possible price, then the reverse iron condor really negates all these concerns.

Here are the trades I will be placing for the week of January 2, 2012 through January 6, 2012 For clarification, I will number each trade as #1, #2, #3, etc., in the order that they are placed.

Trade #1: Wednesday, January 4, 2012 - The Mosaic Company

The Mosaic Company is scheduled to report earnings after the market closes on Wednesday.

Mosaic engages in the production and marketing of concentrated phosphate- and potash-based crop nutrients for the agriculture industry worldwide. The company also offers phosphate-based animal feed ingredients; and produces and sells potash for use as fertilizers and animal feed ingredients, as well as for use in industrial applications.

Currently, Mosaic is trading at $52.45/share. The 52-week range is $44.86 - $89.24.

52wk high: 89.24
52wk low: 44.86
EPS: 6.12
PE: 7.70
Div Rate: 0.20
Yield: 0.381316
Market Cap: 23.43 B
Volume: 3.1 M
Click to enlarge

With Mosaic, there are really two options available. Since the stock does have weekly options available, I considered using a reverse iron condor spread with the January Week 1 expiration. The main issue with this is that the strike prices are in $2.50 increments. Using weekly options with this format can be a bit of a concern. Instead, I am going to use the January 2012 expiration (which expires on Jan. 20).

I will be purchasing twenty-five contracts on each "leg" of this trade. The trade should be placed exactly as seen below. With Mosaic currently trading at $52.45/share, I will use the following strike prices:

  • Buy (25) MOS January 2012 $52.50 put options
  • Sell (25) MOS January 2012 $50.00 put options
  • Buy (25) MOS January 2012 $55.00 call options
  • Sell (25) MOS January 2012 $57.50 call options


Cost/Proceeds $3,975.00
Option Requirement $0.00
Total Requirements $3,975.00
Estimated Commission $125.00
Click to enlarge

The current bid/ask spread on this trade is $1.51 - $1.67. Using a limit order of $1.59 should get your order filled. This spread is based on the current price, which should change slightly by next week.

Here is a closer look at the profit/loss chart at expiration:

Current Price: $52.45

Price Profit / Loss
37.50 $2,275.00
44.10 $2,275.00
50.00 $2,275.00
50.91 $0.00
51.04 ($330.00)
52.50 ($3,975.00)
55.00 ($3,975.00)
56.59 $0.00
57.50 $2,275.00
57.99 $2,275.00
71.88 $2,275.00
Click to enlarge


Cost/Proceeds $3,975.00
Option Requirement $0.00
Total Requirements $3,975.00
Estimated Commission $125.00
Click to enlarge

The break-even points are $50.91 and $56.59. If Mosaic is trading at or above $57.50/share at expiration, the total maximum profit is $2,275.00, minus commission costs. If Mosaic is trading at or below $50.00/share at expiration the maximum profit is also $2,275.00, minus commission costs.

It is important to not that because the reverse iron condor is a four-legged trade, commission costs are significant, but the trade is still well worth placing. The maximum percentage gain would equal 57.2%, minus commissions. That is not too bad of a ROI for what I consider a high probability of being a successful trade.

Out of the $20,000.00 in the portfolio, this trade will cost $4,100.00, including commission costs.

On September 23, 2011, Mosaic released their first-quarter earnings. Here is how the stock traded following the release and in the ensuing two weeks after reporting:

Date Open High Low Close Volume
Oct 7, 2011 53.68 53.83 50.42 51.19 7,212,608
Oct 6, 2011 52.35 53.95 52.35 53.30 8,782,637
Oct 5, 2011 48.97 52.43 48.97 52.18 10,119,738
Oct 4, 2011 46.32 49.23 44.86 49.08 15,724,460
Oct 3, 2011 48.76 50.27 47.12 47.13 10,970,924
Sep 30, 2011 53.14 53.14 48.49 48.97 18,900,122
Sep 29, 2011 56.83 56.98 52.61 54.20 18,403,019
Sep 28, 2011 60.22 60.22 56.71 57.19 9,203,833
Sep 27, 2011 61.13 61.90 59.63 60.35 9,061,428
Sep 26, 2011 58.27 58.90 54.50 58.76 12,752,100
Sep 23, 2011 57.89 60.58 56.52 57.70 36,809,733
Sep 22, 2011 62.23 62.55 58.90 60.11 14,204,985
Click to enlarge

On July 18, 2011, Mosaic released their fourth-quarter earnings. Here is how the stock traded following the release and in the ensuing week and a half after reporting:

Date Open High Low Close Volume
Jul 29, 2011 69.49 71.07 68.45 70.72 4,437,898
Jul 28, 2011 71.06 72.39 70.30 70.55 5,020,773
Jul 27, 2011 71.74 72.00 70.36 70.63 4,581,182
Jul 26, 2011 73.14 73.14 71.50 72.19 4,384,698
Jul 25, 2011 72.04 74.31 71.89 73.03 5,666,333
Jul 22, 2011 71.62 74.00 71.46 72.88 9,794,104
Jul 21, 2011 69.29 70.99 68.52 70.62 6,363,942
Jul 20, 2011 69.28 69.55 68.62 68.96 5,881,824
Jul 19, 2011 68.38 69.97 67.55 68.49 12,921,491
Jul 18, 2011 66.77 66.88 65.36 66.46 5,503,065
Click to enlarge

On March 30, 2011, Mosaic released their third-quarter earnings. Here is how the stock traded following the release and in the ensuing two weeks after reporting:

Date Open High Low Close Volume
Apr 15, 2011 75.17 75.30 73.75 73.85 4,540,652
Apr 14, 2011 76.02 76.60 74.76 75.49 4,520,691
Apr 13, 2011 77.33 77.78 75.99 76.79 2,987,398
Apr 12, 2011 77.10 77.56 75.86 76.67 3,860,843
Apr 11, 2011 79.50 79.52 77.57 78.20 3,577,669
Apr 8, 2011 79.34 79.50 77.75 78.41 3,704,361
Apr 7, 2011 80.77 81.06 79.01 79.14 3,885,190
Apr 6, 2011 82.96 82.96 80.30 80.69 3,574,570
Apr 5, 2011 82.81 83.41 82.29 82.56 3,893,937
Apr 4, 2011 81.77 82.71 80.55 82.46 4,239,718
Apr 1, 2011 79.49 81.53 79.40 80.37 6,329,430
Mar 31, 2011 81.82 82.40 78.55 78.75 9,016,226
Mar 30, 2011 79.96 80.49 78.89 80.45 5,135,240
Mar 29, 2011 77.87 78.94 76.66 78.85 2,559,394
Click to enlarge

What is very important to understand when using the reverse iron condor is that you will need to close your position before expiration. This is because you stand the chance that you may be assigned the stock if you do not do so.

One benefit of the reverse iron condor is that you do not have to monitor it continuously like you would a straddle or strangle trade. Another important aspect to remember with this trade is that it is almost always in the negative initially. This is because the closer the expiration is, the higher likelihood that the one side of your trade will be profitable, with less chance that it will revert to the middle strike prices, which is the worst possible scenario when using the reverse iron condor spread. In short, do not panic when trade is initially in the negative. This is how the trade is designed.

However, this is not to say that you cannot close the position early and profit. This happens frequently. Last week's Oracle trade is the perfect example of this. I closed the position the day after they reported.

Trade #2: Thursday, January 5, 2012 - Monsanto Co. (MON)

Monsanto Co. is scheduled to report earnings before the market opens on Thursday.

Monsanto provides agricultural products for farmers in the United States and internationally. It operates in two segments, Seeds and Genomics, and Agricultural Productivity.

Currently, Monsanto is trading at $70.98/share. The 52-week range is $58.89 - $78.71.

52wk high: 78.71
52wk low: 58.89
EPS: 2.96
PE: 23.90
Div Rate: 1.20
Yield: 1.6906
Market Cap: 38 B
Volume: 1.49 M
Click to enlarge

With the Monsanto trade, I will be using the strangle options strategy. I will be purchasing five (5) February 2012 $72.50 strike call options and five (5) February 2012 $67.50 strike put options. Currently, the bid/ask spread for this trade is $4.22 - $4.30. This should change by the time the markets open on Tuesday, but not significantly. I will place a "good until canceled" limit order at $4.26 and wait for it to get filled. Please see my InstaBlog for any changes to the price paid if the option prices should change, as I will keep everyone up-to-date on my trades there.

The total cost of this trade, using five contracts on each side of the trade, is $2,142.95, which includes commission costs.

Here is a closer look at Monsanto's past earnings moves:

On October 5, 2011 Monsanto released fourth-quarter earnings. The stock saw the following price move:

Date Open High Low Close Volume
Oct 7, 2011 70.44 71.86 69.87 70.93 6,842,375
Oct 6, 2011 67.50 71.68 67.39 71.29 12,635,519
Oct 5, 2011 64.52 66.50 63.75 66.25 9,752,005
Oct 4, 2011 59.15 63.26 59.15 63.25 9,112,426
Click to enlarge

On June 29, 2011, Monsanto released third-quarter earnings. The stock saw the following price move:

Date Open High Low Close Volume
Jul 1, 2011 72.65 72.65 72.65 72.65 5,504,400
Jun 30, 2011 70.41 72.86 69.61 72.54 10,069,039
Jun 29, 2011 69.66 70.51 69.00 70.26 10,163,806
Jun 28, 2011 66.09 67.25 66.03 66.90 4,609,795
Click to enlarge

On April 6, 2011, Monsanto released second-quarter earnings. The stock saw the following price move:

Date Open High Low Close Volume
Apr 8, 2011 67.92 68.09 66.16 66.22 8,718,852
Apr 7, 2011 69.46 69.85 67.95 67.97 9,377,823
Apr 6, 2011 72.92 73.79 68.80 69.16 16,596,014
Apr 5, 2011 74.13 74.25 72.76 73.60 6,394,567
Apr 4, 2011 73.63 74.46 73.30 74.05 3,515,644
Click to enlarge

To summarize this week's trades and account value:

Account: $20,000.00

Trade # 1 - The Mosaic Company

Cost: $4,100.00

Trade #2: Monsanto Co.

Cost: $2,142.95

Total account value after trades: $13,757.05.

Of course, you can choose to decrease or increase the position to suit your own preference. Next week, I will be posting my upcoming earnings trades that I will be placing with this portfolio.

Disclosure: I am long AAPL, GOOG, AA, C, JPM. I will be opening a reverse iron condor with Mosaic on Tuesday. I also own long calls in the stocks I have in the disclosure.