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I have been away for a while, but since earnings season is about to start picking up soon, I will once again give some recommendation on earnings trades that I find worth playing weekly.

For the most part, and for those who are not familiar with how I trade, I like to use three basic strategies around an earnings trade. I learned long ago that taking one side of a trade, whether bullish or bearish, can only lead to disaster. While your returns may be higher when taking only one side, the losses you can have will be immense.

The three earnings strategies I implement are the following:

  • The Neutral Calendar Spread (used when you feel the implied volatility on the weekly options is too high, and so is the price of the weekly option. This trade works like a champ when a stock moves minimally after earnings).
  • The Reverse Iron Condor (used when you are expecting a rather large move in the price of the stock after they report earnings. This trade works great on volatile stocks with a history of decent to large price moves after reporting earnings). Examples include Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Green Mountain Coffee Roasters (NASDAQ:GMCR), Netflix (NASDAQ:NFLX), and so on.
  • The Long Put Butterfly Spread (used when little price movement is expected). I have used this strategy with Intel (NASDAQ:INTC) many times over the years and it has been very successful.

You can find more about the strategies by reading my past articles here on Seeking Alpha or at www.theoptionsguide.com/.

While I am not a big proponent of weekly options (options that expire with a one-week time frame and open on Thursday mornings) for daily trading or quick swing trades, I do enjoy them when using the Neutral Calendar Spread or the Reverse Iron Condor. I would like to add that I will never recommend any sort of credit spreads for various reasons, which I may write a more detailed article about soon.

Here is the trade I will be making next week, October 1 - October 5. There is only one this time, but for longer lists, I usually list the order chronologically and with specific dates and times (whether the company reports before or after the market closes). It is also important to note that the price of the stock may change from the time of writing, so please keep that in mind when choosing your strike prices:

The Mosaic Company (NYSE:MOS) - reports earnings before the market opens on October 2, 2012.

Currently, the stock is trading at $57.54/share. The 52-week range is $44.43 - $62.65.

Mosaic's stock price has been somewhat unpredictable after announcing earnings. On its last report, July 17, 2012, the stock had the following price movement:

DateOpenHighLowCloseVolume
Jul 17, 201256.8359.0056.6958.2110,336,093
Jul 16, 201254.6555.5054.3855.374,494,964

What is interesting here is that the closing price on July 16 was $55.37. At the open the next day, the stock only moved up to $56.83. That is not too much of a price move, which would make the Neutral Calendar Spread an ideal trade. However, if the trader waited to close the position until later in the day, the stock price increased substantially, to a high of $59.00. This is a situation where selling early would benefit the trader, so keep this in mind. It never hurts to take profits early.

On March 28, 2012, Mosaic had the following price move after reporting earnings:

DateOpenHighLowCloseVolume
Mar 29, 201256.3757.3554.6155.2710,932,415
Mar 28, 201258.5258.5856.9358.226,301,601
Mar 27, 201258.8859.8058.5358.585,463,840

As of right now, I will place this trade on Monday, October 1. I would prefer to have the stock price trading near the closest strike prices I will use. Here is how to place this trade:

Neutral Calendar Spread

  • Sell twenty-five (25) October Week 1 $57.50 strike call options.
  • Buy twenty-five (25) October 2012 $57.50 strike call options.

Requirements

Cost/Proceeds$1,000.00
Option Requirement$0.00
Total Requirements$1,000.00
Estimated Commission$75.00

Current Price: $57.54

PriceProfit / LossROI %
43.13($1,000.00)-100.00%
48.66($995.00)-99.50%
54.50($170.00)-17.00%
54.75$0.000.00%
57.50$2,430.00243.00%
60.33$117.5011.75%
60.52$0.000.00%
66.16($920.00)-92.00%
71.99($945.00)-94.50%

I really like the way that this trade is setting up. There is always the possibility that you may be able to close this trade for a profit early, but you cannot always expect this to happen. If available, I recommend doing so if the ROI meets your goal.

I should have more articles coming out soon, with standard weekly trades and earnings trades. If you have any questions, please leave a comment or send me an e-mail. Thank you.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MOS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Trading Mosaic's Earnings On October 2