In the options world,there are many different kinds of option traders. With the many different kinds of option traders also comes a variety of option strategies. These strategies can be based on bullishness or bearishness of a stock, earnings/conference call and a bullish sector (just to name a few out of the many). Earnings can be an exciting time for option traders and combined with a bullish stock market this can result in some quick profit.
I generally don't make a lot of earnings trades, but when I do, one strategy that has worked for me is trading the run-up as earnings come near and then closing out the trade before earnings. Day traders make money on quick moves upward or downward in a stock, but if you are a swing trader than you're looking for a decent run-up in the stock and be able to profit on the continued upside gain. Sometimes these run-ups happen quickly and at other times they happen gradually.
One stock that I believe could run-up going into earnings is Intel (INTC). One way to take a look at trading the run-up is historical performance. When looking back at Intel's last four quarters earnings reports if investors bought Intel two weeks prior to earnings, investors would have been 4/4 on trading the run-up. Here are examples below:
Earnings January 19, 2012
Stock price closed on January 3, 2012 = $24.25
Stock price closed on January 18, 2012 = $25.39
This $1.14 move upward move represents a 4.7% gain.
Earnings October 18, 2011
Stock price closed on October 3, 2011 = $21.34
Stock price closed on October 18, 2011 = $23.28
This $1.94 upward move represents a 9% gain.
Earnings July 20, 2011
Stock price closed on July 1, 2011 = 22.53
Stock price closed on July 19, 2011 = 23.06
This 0.53 cents move upward represents a 2.4% gain.
Earnings April 19, 2011
Stock price closed on April 1, 2011 = 19.72
Stock price closed on April 19, 2011 = 19.86
This 0.14 cents move upward represents a 0.07% gain.
Source obtained from Yahoo Finance historical prices on Intel.
Historically, Intel has been a stable performing during their last four quarters earnings reports. I wouldn't base my trade only on the basis on how something historically performs, since past performance does not equal future performance. But, take historical performance into consideration.
Technically, Intel has been above its 50 day moving average since January 2012 and each move below the 50 day moving average has provided nice buying opportunities for investors. Intel is in a bullish channel and I have been bullish on Intel since the stock broke the $25 level and has continued higher.
When considering Intel from a fundamental point of view Intel has a price to earnings ratio of 11.7 and their estimates for Intel's earnings per share and EBITDA will be increasing through 2013. In the semiconductor space, Intel is still best of breed and one of my top five bullish technology picks. Trading a trend can be speculative and I usually focus on trading tends in companies that are bullish in the in the short term/ long term, but have catalysts along the way that can help shares rise higher. One catalyst that is coming up is Intel's earnings that will be reported on April 17, 2012. If investors are bullish on Intel and believe in the trend higher then here is a bullish option play on Intel:
Buy June 16 2012 26 Call
Cost of call = 2.40 (2.40 x 100 = $240)
Breakeven = Strike price 26 + cost of call 2.40 = 28.40 (28.40 - current stock price = 0.23 cents or about a 0.9% move)
In this bullish trade investors could select the May strike, but the June calls give investors more time and cost only $6 more (at the time I write this article). This isn't a trade I would want to hold on to through earnings, but if investors want protection this call can be easily converted to a spread and provide protection. Investors could also consider a straddle or strangle, but generally when Intel reports earnings investors don't usually see a large percentage upward or downward move. Sometimes in a straddle/strangle investors might have to commit larger amounts of capital to offset the loss in the call or put. Having at least a 5% move up or down move in a straddle/strangle is a strategy that I prefer when a company has a lot of volatility with earnings and investors can profit if the stock makes a big move in either direction.
On the flip side, if investors want to be conservative then waiting until Intel reports earnings and entering into a bullish position on a pullback can also work as well. There are some stocks that I enjoy trading, but usually avoid their earnings and wait for a pullback. Intel is a stock that I enjoy trading in the long/short term, media events and earnings. If investors believe that Intel could have a run-up going into earnings then buying on this pullback today (Date article is being written is April 3, 2012) could be profitable. Today, I decided to take advantage of the pullback and I bought June 2012 26 strike calls in my hypothetical portfolio for $2.25 a piece. I believe Intel is a good "buy on the dips" stock in the bullish tech sector. For another example, on a stock that I trade trends in check out my article on Ford (F). Thanks for reading and Good Luck
Disclosure: I am long INTC.