We have been mentioning the start of 4Q earnings season is upon us and although the real action doesn't start until next week, there have been some exciting plays this week.
We cover possible earnings trades each and every week in our Weekly Wrap and from time-to-time some of these trades make it to our Daily as official recommendations. We list possible call and put trades on the companies reporting and the research can be time consuming as there are a lot of factors to consider.
We often mention a 5%-10% move in a stock can often lead to 100+% returns with the right options. Stocks often make their biggest moves before, during, and after the announcements and these events happen 4 times a year. By using technical charts, past earnings announcements and reactions, we often get a good feel on where a stock is headed.
We profiled several trades this week including Sonic (SONC, $19.33, up $0.14) for Monday, Apollo Education Group (APOL, $31.03, up $0.27) and Container Store Group (TCS, $37.25, down $1.76) for Tuesday, and WD-40 (WDFC, $72.46, down $3.09) for Wednesday as they announced this morning.
All of these stocks made tremendous moves after reporting their numbers this week but we didn't feel comfortable trading them for various reasons. We had the direction nailed on 3 of the 4 and could have made some loose change but the one trade we profiled that we really liked was Family Dollar Stores (FDO, $61.76, down $4.58).
Shares are down 7% here were our comments Sunday night along with the chart work from the Weekly Wrap (quotes from prior Friday's close).
Family Dollar Stores (FDO, $66.41, up $0.35)
January 65 puts (FDO130118P00065000, $1.50, down $0.30)
Thoughts: Earnings have come in higher by 2 cents the past 2 quarters but the prior 2 were misses of a penny and 6 cents. The current forecast is for Family Dollar to report 69 cents a share on sales of $2.51 billion. We believe they come up short for the recently ended quarter.
The company reported earnings of 68 cents a share versus estimates for 69 cents. Revenue also came in short at $2.5 billion as the suit-and-ties were looking $2.51 billion. Same-store-sales were down 2.8% for the recently ended quarter.
Shares have traded to a low of $60.97 and the decline was enough to power the January 65 puts (FDO130118P00065000, $3.40, up $2.15) to a 172% return.
The other trade we profiled for today was Alcoa (AA, $10.55, down $0.28) and here is what we said in our Weekly Wrap:
Alcoa (AA, $10.57, up $0.04)
January 11 calls (AA140118C00011000, $0.19, up $0.03)
January 10 puts (AA140118P00010000, $0.11, flat)
Thoughts: Shares have been on a roll since they were booted from the Dow and have moved from $8 to double-digits. The stock had been mired in a trading range for years but the recent breakout could continue with a strong quarter.
The January 11 calls traded over 1,800 contracts on Friday and the January 10 calls (AA140118C00010000, $0.67, up $0.01) traded nearly 3,200 contracts. Also of note, the January 10 puts traded over 2,500 contracts on Friday.
If our arm was twisted we would take a shot on the January 11 calls as a possible trade or even the February 11 calls (AA140222C00011000, $0.32, up $0.03) as a "safer" trade as they traded over 4,300 contracts on Friday.
We will likely sit on the sidelines with this one as well because of today's news the company will settle a bribery charge. Not the news a company wants Wall Street to hear before they confess their numbers.
Earnings season will carry on from here on out until mid-March before another quiet period. First quarter earnings start in early April.
The upcoming earnings season is expected to be one of the most important periods in recent years as Wall Street plans for 2014. We said volatility could get crazy this month and with tomorrow's Nonfarm Payrolls report on deck, we are getting close to the eye of the storm.
We expected a flat to choppy session and so far that is how the action is playing out as both the bulls and bears have tugged on the rope. One side could get muddy by the weekend as tomorrow should provide us with some good clues on the next near-term trend.
As we head to press, the Dow is down 18 points to 16,444 while the S&P 500 is lower by a point to 1,836. The Nasdaq is declining 7 points to 4,158 as the battleground at 4,150 comes back into play. The Russell 2000 is off 1 point to 1,158 and the S&P Volatility Index ($VIX, 12.88, down 0.01) is down a smidge.