Seeking Alpha
Profile| Send Message|
( followers)  

Fossil, Inc. (NASDAQ:FOSL) is scheduled to report earnings before the market opens on Tuesday.

Fossil designs, develops, markets, and distributes fashion accessories worldwide.

Currently, Fossil, Inc. is trading at $100.49/share. The 52-week range is $69.57 - $134.98, so there is a lot of room here to move up or down, which is exactly why I like the options trade I am recommending here.

In past quarters, Fossil, Inc. has seen rather large moves after reporting earnings at times. However, there have also been other instances where the stock has only moves marginally.

I am opting to play it safe on this release, yet still have a rewarding profit potential. Basically, this is a "reverse iron condor" spread that is modified somewhat. If I were to use the exact parameters of the "reverse iron condor" spread, it would require a $10.00 price move, up or down. This is too risky. I am not sure one should expect a 10% movement from Fossil's current price.

Instead, here is how I will be placing this trade:

  • Buy 10 at-the-money put options
  • Sell 10 out-of-the-money put options (Lower Strike)
  • Buy 10 at-the-money call options
  • Sell 10 out-of-the-money call options (Higher Strike)

Or, at Fossil's current price, the trade would look like this:

  • Buy 10 February 2012 $100.00 put options
  • Sell 10 February 2012 $95.00 put options
  • Buy 10 February 2012 $100.00 call options
  • Sell 10 February 2012 $105.00 call options

Requirements

Cost/Proceeds $3,800.00
Option Requirement $0.00
Total Requirements $3,800.00
Estimated Commission $50.00

Here is a closer look at the profit/loss chart for this trade:

Fossil, Inc. is currently trading at 100.49/share.

Price Profit/Loss
$71.25 $1,200.00
$82.77 $1,200.00
$94.89 $1,200.00
$95.00 $1,200.00
$96.20 $0.00
$100.00 (-$3,800.00)
$103.80 $0.00
$105.00 $1,200.00
$107.01 $1,200.00
$119.13 $1,200.00
$131.25 $1,200.00

The bottom line is that if you are content with knowing your profit potential ahead of time before Fossil reports their earnings on Tuesday, this trade has many advantages. Also, the stock does not need to move as much as a "straddle" or "strangle" would have to do to realize a profit. Yes, the upside is limited if Fossil should completely tank or soar after earnings, but there is also a very respectable profit either way. This is an extremely safe play that should work great.

If you have any question, please leave a comment or e-mail me. I should be writing plenty of articles soon. Thanks.

Source: Trading Fossil's Earnings Call On Tuesday