When earnings and options expiration collide, things get volatile. Such was the case for last week. Nevertheless, the market made new highs, and the Dow went above 10,000, as it fed the media frenzy! So far, lots of earnings came in better-than-expected, but, there were also some disappointments.
We traded lightly this week as things were volatile. We chose to trade cheaper options so that we weren't risking too much. Here were the closed trades:
October 16, 2009
06:45 | HappyTrading BAC ($17.40) Sold to Close BYOJQ Oct 17 calls, at $0.44 -62%
October 15, 2009
12:56 | HappyTrading GOOG ($528.50) Sold to Close GOPKA Nov 600 calls, at $3.10 -3%
12:18 | HappyTrading AIG ($44.80) Sold to Close IKGJS Oct 45 calls, at $0.53 -54%
07:28 | HappyTrading CNX ($50.50) Sold to Close SDFJW Oct 48 calls, at $2.55 +28%
October 14, 2009
12:51 | HappyTrading BAC ($18.57) Sold to Close BYOJQ Oct 17 calls, at $1.60 +50%
12:32 | HappyTrading GOOG ($535.30) Sold to Close GOPKA Nov 600 calls, at $4.60 +44%
11:51 | HappyTrading AEM ($71.95) Sold to Close AEMJN Oct 70 calls, at $2.40 +13%
We got into GOOG and BAC early in the week and were able to lock in partial profits on Wednesday when the market rallied on INTC and JPM earnings. The partial profits gave us some cushion in our remaining positions. On Thursday, in our Trading Room, I mentioned that GOOG looked strong, but, BAC looked weak:
October 15, 2009 7:08 AM
October 15, 2009 11:08 AM
I also thought that even though GOOG looked strong, it may not jump as much right after the earnings as some people might think:
October 15, 2009 8:19 AM
I"m not sure how far GOOG can jump right after the earnings (maybe $20?); charts are bullish, but, may have to wait for a more steady climb. So, might not worth the risk holding before the earnings... I'm going to see how things go today...
GOOG did report strong earnings and beat the estimates. On Friday, GOOG closed $19.94 higher (right on target)!! We decided to exit the GOOG Oct 600 calls on Thursday before the earnings. This was because I did not see GOOG going too far above $550 on Friday and if it didn't, the premiums on the November out-of-money calls were going to get crushed. Indeed, on Friday, they did.
We kept the remaining position on BAC even though BAC looked weak before the earnings. This was because we had already locked +50% profit on the BAC trade which brought the cost of our remaining BAC position way down (around $0.6). I also did not think that BAC would go below $17 even if it didn't meet the estimates, which would leave our Oct 17 calls within the money. However, if BAC had reported well, it had room to jump to $20. So, it was a small risk for us to take and the potential reward was big. As it turned out, the chart was correct in showing BAC's weakness: BAC missed, but, stayed above $17. We exited the remaining BAC position in the morning.
It is always exciting to play the expiration week as the potentials are so big. But, it is also very important to keep a clear head about how you manage your risks. During the expiration week, options can be very volatile, by limiting your risks you can feel more comfortable with your decisions and increase your chances of hitting good trades. And, when you do hit them, it can often be very rewarding. This expiration week was actually very muted as the market jumped early on Wednesday and basically traded flat for the rest of the week. But, every month, there's another chance!
Hope you're enjoying your weekend. I'll be back this evening for my weekly Market Forecast!