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John R. Conway's  Instablog

John R. Conway
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When I am not trading/investing I enjoy cooking, which is my second passion next to investing. I currently reside in St. Louis, Missouri and I am a graduate of the University of Missouri-St. Louis with a Bachelor of Liberal Studies. I also was in the US Army for eight years in the reserves/in... More
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  • Trading Teradyne's Earnings

    When it comes to trading a company's upcoming earnings one of my favorite options strategies to employ is a strangle. The strangle is the purchase of a call and put and where an investor expects a decent move to the upside or downside to profit from. When using a non-directional strategy (straddle, strangle and reverse iron condor) traders do not need to be concerned about what the particular company reports, but weather earnings will be a catalyst for future gains and or losses for a company's stock price.

    While any trader can speculate on a company using non-directional strategies, I prefer to use non-directional strategies near earnings. A company's earnings can be a strong catalyst to further upside or downside and by using a non-directional strategy you get to play on both sides of the fence without making a one-sided bet. When considering trading a company's earnings using non-directional strategies one factor to consider is looking at probability of success. Some stocks show a pattern of success using non-directional strategies and others don't. In 2012 Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) were favorites of mine using non-directional strategies and proved successful. Please read here and here.

    I enjoyed trading non-directional strategies on Home Depot and Lowe's since they have similar business models and a bullish housing market generally benefits both of these stocks. My thesis for trading non-directional options (strangle) was that both Home Depot and Lowe's were constantly making new highs and any a sub-par earnings report could spur selling. Having a thesis that matches probability of success can be helpful to validate where a certain stock is heading to and achieve desirable returns.

    One stock to consider using a non-directional strategy on is Teradyne (NYSE:TER). Teradyne is a global supplier of automatic test equipment that tests semi-conductors for commercial, defense and aerospace customers globally. The company has three main components that are semi-conductor, systems test group and wireless test segment. The semi-conductor sector has been modest with only a 4% gain in the last three months, while Teradyne has enjoyed an over 20% gain in three months. When taking a quick glance at Teradyne traders will notice that the company has a history of making positive earnings surprises. In fact the last eight earnings reports have been positive earnings surprises reported for the company. Now just because a company has a history of been beating earnings doesn't mean the price of the stock will only move one way. When taking a look at a chart of Teradyne below investors will notice that Teradyne has seen upward bullish momentum since October 2012 and has done well when bought on dips.

    Traders should also notice that Teradyne has struggled with the mid $17 level since February 2012 and the stock has tried unsuccessfully getting through the mid $17 level on February 16, March 27, April 27 and most recently January 2, 2013. With earnings coming right around the corner this may be the time (or not) that Teradyne either breaks higher or lower and here are some reasons to consider strangling Teradyne's upcoming earnings.

    1) Teradyne can be viewed as a seasonal stock where the first and second quarters typically show strong semi test orders and the third/fourth quarters being lower. China is a big source of revenue for Teradyne and any decline in revenue can hurt the company.

    2) Look for Teradyne to continue to use their balanced cash position for growth, research & development and acquisitions rather than paying a dividend.

    3) Gross margins for Teradyne for Q3 came in at 56.2% compared to 56.8% for Q2 2012. I would expect gross margins to stay around the same level for the upcoming quarter, but a decline in net bookings could signal a short term top in gross margins.

    4) If traders used a strangle on Teradyne's last three earnings reports these have produced a decent profit (examples below).

    October 25, 2012 Q3 earnings: On October 23, 2012 buy the (Nov 14 call/13 put) strangle for .79 On November 12, 2012 traders could have closed out this strangle for $1.70 and pocketed $91 profit per strangle.

    July 26, 2012 Q2 earnings: On July 15, 2012 buy (Aug 14 call/13 put) strangle for $1.05 On August 16, 2012 traders could have closed out this strangle for 1.925 or $87 profit per strangle.

    April 26, 2012 Q1 earnings: On April 16, 2012 buy (May 17 call/16 put) strangle for $1.22 On May 18 traders could have closed out the trade for $1.67 or $45 profit per strangle.

    On January 14, 2012 I purchased the February 17/16 strangle for $1.05 With Teradyne not currently able to break through the $17 and if earnings fail to act as a catalyst the stock in the short term could dip down to the mid $15 level. However, on the other side Teradyne could give a good earnings forecast that might allow the shares to break $17 and continue making gains in 2013. Over Teradyne's last three earnings the stock has made some significant moves with at least a minimal of 12% price movement (up and down).

    Trade Breakdown

    Buy (1) February 17 call for 0.60 (0.60 x 100= $60)

    Buy (1) February 16 put for 0,45 (0.45 x 100 = $45)

    60 + 45 = $105 cost for February strangle

    Days till expiration 31

    In conclusion, past performance doesn't mean the future will automatically bring profit on a non-directional strategy going into earnings. If Teradyne can't get through the $17 level I could see the stock dip into the mid $15 range. The mid $15 range is also the breakeven point for the put-side of this trade idea. With Teradyne's technical set-up and with earnings right around the corner I don't mind speculating for around $1.00

    Thanks for reading and good luck.

    Disclosure: I am long TER.

    Additional disclosure: I own the Feb $Ter 17/16 strangle

    Jan 22 10:39 AM | Link | Comment!
  • July/August Performance

    July 15 Smith & Wesson

    Trade Idea: Vertical call spread or deep in the money call--The company once again beat expectations and investors made money. Weather one likes options or buying stock SWHC has been on a tear since the beginning of the year. I still like the stock and I don't expect major changes to gun legislation that would impact the stock. Stay Long.

    July 18 Reverse Iron Condor On Amazon's upcoming earnings

    Trade Idea: Reverse Iron Condor that produced a small profit and if investors held on after earnings the stock had a nice pop. Amazon has rallied about $30 since. I would be looking to do a similar trade on Amazon for their next upcoming earning, since earnings can be volatile.

    July 31 Trading Options On Home Depot and Lowes Upcoming Earnings

    Both were successful and I traded Home Depot for a nice profit. I would be looking to do a straddle or strangle for their next earnings. Since the beginning of the year every single time a straddle/strangle has been done (at least 2 weeks prior to earnings) these have continued to be successful.

    August 1 Bearish ideas on Facebook and General Electric

    The vertical put spread on Facebook would be successful when Facebook was in the 17 range, but since then the stock has been on a rally. The option play on General Electric was a cheap insurance play that I did not participate in. I am neutral on Facebook and bullish on General Electric.

    August 30 trading options on Philip Morris

    The trade didn't initially work out as planned, but I kept adding to the position and was able to break even/make a small profit. i still like tobacco, but 92.50/94 is my price target for PM. I am neutral on PM as I can see rotation out of these dividend giants and money will be flowing into growth stocks.

    Current articles working on ----Sherwin Williams (NYSE:SHW)


    I will continue to provide option based articles, but my shift will focus on stocks, since I have taken on more responsibilities in my employment as a chef. I will still be doing option plays, just the frequency will not be as much. Feel free to message me for any questions/trade ideas. Thanks again for following and look forward to talking to you soon.

    Disclosure: I am long RF.

    Additional disclosure: long MO, GE, IAU, ,T RF, MBIA, KO, INTC, common stock

    Sep 19 4:14 PM | Link | Comment!
  • June Performance

    The summer is generally not my favorite time to invest and historically over the last couple of years I tend to be neutral during the summer. There is still constant news about Europe and other concerns over global slowdown and with that I am still sticking to my game plan of large cap US only stocks with little or no overseas exposure. My favorite picks since the beginning of the year have been AT&T (NYSE:T) and Altria (NYSE:MO) and despite the mixed markets these 2 stocks have been going higher ( even on down days). Lets take a look at my June calls:

    1) Facebook (NASDAQ:FB) = I recommended to stay away from Facebook until the hype has died off and Facebook isn't on T.V. everyday. When I wrote about Facebook the stock was at $27.72 and now the stock trades at $32.82 Looks the hype/pessimism has faded away and though I am not a Facebook user, I like the stock, but for speculation only until some financial data comes out. I currently have not position on Facebook, but would consider using OTM calls that are at least 3 months from expiration as a cheap speculation trade.

    2) XLI industrial etf= This ETF has struggled with the 35 level and I recommended the July 33/30 vertical put spread for $83. Since this date the ETF hasn't moved much and I believe the 35 level will be a level this ETF will struggle with. This is not one of my greater picks as time decay basically killed this trade as the trade is now worthless.

    3) Ritchie Bros. (NYSE:RBA) Who doesn't like a auction. I wanted to focus on niche market plays or names that are not wildly known. One of the main reasons I like Ritchie Bros is that at their auctions they are mostly no reserve and everything gets sold. Their business model is simple and easy to understand. I recommended the stock at $19.85 and now the stock is at $21.51 I am still slightly bullish on the stock as the company can be described as somewhat economic resistant. No options play

    4) United Rentals (NYSE:URI) Another niche play since its simply cheaper to rent large equipment than buy it. When I wrote about URI on June 22 the stock was at $33.43 an now the stock is at $34.34 Not a big gain, but if economy picks up any steam shares of URI will climb higher. No option play

    Once again thanks for the comments and for reading the articles that I have presented for you. Feel free to message me anytime with any questions/comments as I will always answer you in enough details as I can possibly provide. For July and August I am going to continue to be cautious since last year during this time the market wasn't doing so great and we could possibly repeat the past. For July and August I will be writing/trading options on what has been working for me and the market. Stay tuned and thanks again.

    Disclosure: I am long MO, T.

    Jul 09 12:28 PM | Link | Comment!
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