The 'Earnings Play': Let's Get Real

Includes: AAPL, CAKE, CAT
by: Reel Ken

I always enjoy reading all the "buzz" just before any stocks earnings release. In particular Apple (NASDAQ:AAPL), Caterpillar (NYSE:CAT) and Cheesecake Factory (NASDAQ:CAKE) are causing quite a stir. Everyone seems quite willing to chime in with some "play" to be made.

Now I won't argue with those that are looking for some sweet-spot option play. Will AAPL, CAT or CAKE beat or miss, by how much and what will be the "pop or drop"?

Quite frankly, I think these are all the wrong questions. The right question is "Do I want to own one of these stocks"?

For instance, if AAPL is going to $1,000 (as some predict), does it really matter if you buy it at $572 or $600? If you buy AAPL at $600 and it goes to $1,000, I guarantee you that you won't lament over the fact that you could have gotten it at $572. Instead, you will kick yourself for not having bought more. That's just how human nature works.

On the other hand, if you don't think AAPL, CAT, CAKE, or any stock is worth adding to your portfolio, just stay away. Find something else. If you can't find something else, buy the best bet and short (hedge) everything else.

So, that brings us to the moment of decision. For me, AAPL still represents a great company with a great future. Sure a competitor may bring out a knock-dead product and eat into AAPL's market share. Sure, AAPL may misfire, now and then (everyone does). But, until that happens, "I'm in".

Now all this doesn't mean I won't look for opportunity. Volatility is always very high around earnings releases and this is reflected in option pricing. I want to take advantage of this.

So, I'm going to sell the April 27 at-the-money Put, with a strike of $570 on AAPL. I select the $570 ATM as it has the greatest extrinsic value. It sells for $20.85, which is almost 3.7% of AAPL's current $572 price.

If AAPL goes up, I make this $20.85. If AAPL climbs over $595 I would have been better off just buying the stock, but I can always do that. Doesn't matter much if AAPL is on the road to $1,000.

If AAPL falls, I'm a net buyer at approximately $550 (strike minus premium). If AAPL falls a little more, I might have been able to "time it" better, but when AAPL climbs, what real difference does it make.

So, instead of trying to figure the "best play", the "smart play" or any other "play", why not just decide if you want to own the stock. If so, then get involved in some meaningful way. If you don't, then move on.

I like to remind myself that HFTs and hedge fund managers have to squeeze every inch out of a stock. For the typical investor, it's more about picking the right stock .

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I sell and buy options ob AAPL

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