MyHappyTrading's  Instablog

The market bounced a bit today, after yesterday's big drop.  Jobless claims dropped and some progress was made in Europe on the debt crisis.  The Dow was up +112.92 points; SPX added +10.6 points; Nasdaq climbed +3.5 points.  However, the market was still very range-bound and was mostly just treading water.

Energy and financials led the market.  Oil climbed higher while gold took a sizable drop.

Let's go back to what we were talking about on Tuesday, playing earnings.  CSCO reported better-than-expected quarterly results and was up +5.68%.  But, with the gain of just $1, it was not enough for us to risk an options play.  If you look at CSCO's call options, you'll see that they hardly moved today.  On the other hand, GMCR was a huge mover, down a whopping 39%!  GMCR reported last night with a miss on sales.  GMCR has been dropping precipitously since mid-September, from a high of $116 down to today's $40!

So, let's take a look at GMCR's chart:

GMCR

From GMCR's 1-year chart, we can see that there was a big gap between $60 and $45, just waiting to be filled.  Yesterday, the weekly 60 puts traded from about $2 to $3.  I picked some up at $2.4 and sold them near the open at $12.7 for a profit of +429%:

If you did not read Tuesday's article, you might want to read it now before continuing.  So, the target here was $45.  With 60 puts only at $2.4, the risk/reward ratio was very small.  It was worth risking $2.4 to gain more than $10, easily.  I got out at open, and much too soon, because the market was up on the aforementioned headline news.  These GMCR weekly 60 puts traded as high as $20.3 which GMCR briefly hit below the $40 mark.

So, to reiterate, when playing earnings, (1) make sure you are trading a stock that you know well; one that you know can make a big enough move for you to take the risk.  Secondly, (2) see if you can identify a target for the stock to potentially move to.  Then, (3) find an option strike with a price that has the math that makes sense.  For me, if I can't at least see a +100% gain, it's not worth the risk.  That % also varies with respect to the stock.  For some stock, because the premium may be higher, you'd want to make sure the potential reward is higher.

The overall market is pretty crazy right now, so, we are mostly staying in cash and only trading small and light trades.

Good night and HappyTrading! ™

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