5 Earnings Options Trades For The Week Of Feb. 13-17

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Includes: BIDU, CF, CLF, NTAP, VFC
by: SteadyOptions

In this article, I will describe some of my favorite ways to trade earnings for companies reporting during the week of February 13-17, 2012.

My regular readers already know that my favorite way to play earnings is buying a strangle a few days before earnings and selling it just before earnings are announced (or as soon as the trade produces a sufficient profit). The idea is to take advantage of the rising IV (Implied Volatility) of the options before the earnings. I described the general concept here. In general, I look for companies having a history of big post-earnings price moves. Those big moves will cause the IV to spike before earnings.

In some cases I will buy an Out-of-The-Money (OTM) strangle and sell a further OTM strangle, creating a Reverse Iron Condor.

So here is the list of next week's candidates in chronological order:

Trade #1: NetApp (NASDAQ:NTAP)

NetApp reports earnings on Wednesday, February 15, 2012, after the market close. With the stock currently around $39.80, I'm looking at the following trade:

  • Buy NTAP February 2012 40.0 puts

  • Buy NTAP February 2012 40.0 calls

Notice that I'm buying the same strikes this time, creating a straddle.

Trade #2: Cliffs (NYSE:CLF)

Cliffs reports earnings on Wednesday, February 15, 2012, after the market close. With the stock currently around $75.50, I'm looking at the following trade:

  • Buy CLF February 2012 75.0 puts

  • Buy CLF February 2012 75.0 calls

Notice that I'm buying the same strikes this time, creating a straddle.

Trade #3: CF Industries (NYSE:CF)

CF Industries reports earnings on Thursday, February 16, 2012, before the market open.

With the stock currently around $187.30, I'm looking at the following trade:

  • Sell CF February 2012 175.0 put

  • Buy CF February 2012 180.0 put

  • Buy CF February 2012 195.0 call

  • Sell CF February 2012 200.0 call

Trade #4: V.F. Corporation (NYSE:VFC)

VF reports earnings on Thursday, February 16, 2012, before the market open.

With the stock currently around $133.20, I'm looking at the following trade:

  • Buy VFC February 2012 130.0 put

  • Buy VFC February 2012 135.0 call

Trade #5: Baidu (NASDAQ:BIDU)

Baidu reports earnings on Thursday, February 16, 2012, after the market close.

With the stock currently around $130.20, I'm looking at the following trade:

  • Sell BIDU February 2012 120.0 put

  • Buy BIDU February 2012 125.0 put

  • Buy BIDU February 2012 135.0 call

  • Sell BIDU February 2012 140.0 call

You can look here for some additional ways to play Baidu earnings.

The main idea behind those trades is "renting the strangle/straddle" (or the reverse Iron Condor) before the earnings. An increase in IV should help to neutralize the negative theta and keep the floor under the strangle price. As we know, earnings are 50/50. This is a trade for those who don't want to bet on the direction of the stock and don't want to hold through earnings.

Some additional considerations for all trades:

  1. The main and only risk of those trades is the negative theta (time decay). Some of the trades are using options that expire in just few days so the theta is fairly large. The expectation is that an increase in IV will offset the theta, but it doesn't always happen. If the stock moves, it will help. In any case, you can control your loss since theta damage is gradual. It is very unusual to lose more than 10-15% on those trades.

  2. If you don't want to place the Reverse Iron Condor, you can do the trade with the strangle or straddle. The trade will be more expensive and the negative theta much higher, so I recommend to be in the trade no more than 3-5 days.

  3. Choice of strikes depends on your risk tolerance. Risk and reward are always closely related. Going far out of the money will gain more if the stock has a decent move. Going near the money will gain less with less risk. I usually like strikes with deltas in the 25-30 range, which is a good compromise in my opinion. My article "Google Earnings Trade: Risk Vs. Reward" has a good discussion on the choice of strikes.

Good luck. Let me know if you have any questions in comments below. The prices might be different when you place the trade so adjust the strikes accordingly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I will be placing some of the described trades within the next 72 hours