The second week of January begins a new round of earnings. Things got off to a good start with Alcoa (NYSE:AA) as they reported earnings of 6 cents a share, in line with analyst estimates. They also delivered a rosy outlook for the rest of their year. Shares rose after the market close almost 1.5%.
The question now becomes, what's on tap the rest of the week and how can I use options to take advantage of it? We will see Constellation Brands (NYSE:STZ), SuperValu (NYSE:SVU) , and Wells Fargo (NYSE:WFC) all report before the end of the week. The best way to take advantage of future earnings results is to take a look at what happened in the past.
Constellation Brands reports Q3 earnings at 7:30am ET Wednesday January 9, 2013. The analysts estimates are coming in at $0.55 per share. Over the last 4 earnings results, STZ has moved an average of $2.64. The $37.50 straddle in the January (monthly) options is pricing in a $2.60 cent move by expiration (11 days), right in line with previous earnings results. Looking at past results we can see covered calls have a fairly high probability of being profitable:
Overall, options traders are expecting an average move in STZ. The covered call would be a good strategy. It has had good results in the past, and it will take advantage of the impending post-earnings implied volatility crush.
SuperValu reports Q3 earnings at 8:00am ET Thursday January 10, 2013. Analysts estimates are coming in at $0.07 per share. Looking at their past 4 earnings results, SVU has moved an average of $1.18. The $3.00 straddle in the January options is pricing in a $0.50 cent move by expiration (10 days). This looks to be severely underpriced compared to previous earnings results even considering the stock is down almost 50% in the past 6 months. Looking at past results we can see long straddles have a fairly high probability of being profitable:
As experienced options traders know, it is rarely a good idea to hold long volatility into earnings results. However, it may be the correct play in SVU. Not only is the long straddle underpriced compared to normal but holding a long straddle is actually the most profitable earnings play in SVU compared to other options strategies.
Wells Fargo reports Q4 earnings at 8:00am ET Friday January 11, 2013. Analysts are estimating an average of $0.89 per share. Looking at their past 4 earnings results, WFC has an average move of $0.85. The $35.00 straddle in the January options is pricing in a $1.25 cent move by expiration (9 days). This looks to be underpriced compared to previous earnings results. Looking at past results we can see covered calls have a fairly high probability of being profitable:
Options traders are betting a less than average move in WFC. The covered call strategy makes sense here. Not only has it been consistently profitable in past earnings situations (75%) but it take advantage of the vega and theta decrease.
Graphs and Option Information provided by OptionCast.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.