To start, you often hear that "Trading Earnings is a Gamble" or "Do Not Trade During Earnings" but option traders know that this is the best time to trade, and the most opportunity for big gains. I use fundamental, technical, and options flow analysis, sometimes for directional trades, and other times you can be a net buyer/seller of volatility, so always a lot of flexibility when trading options.
Each week I send out a quick snapshot of the primary reports, the stocks that move, and a trade to consider into earnings.
Here is a review of this past week's with the result:
7 Earnings Snapshots for the Week of November 7th
Priceline.com (PCLN) will report earnings Monday after the close, and shares have jumped more than 8% on earnings 4 of the last 5 reports, including a 22% climb in Aug. 2010, while May 2011 was the only negative reaction, just a 2.8% loss, so a positive history of earnings reactions. Priceline shares have a lot of support at the $450 level and resistance at $552, currently consolidating in the $480 to $525 range. Both MACD and RSI are in downtrends since the July highs. The $25.55B online travel Co. trades 17.6X forward earnings, 1.4 PEG and 26.77X cash flow, considered one of the top growth plays, but a weak EU economy could hamper results. Wedbush started shares Outperform in September with a $675 target. Piper expects a slight beat and In-Line guidance, Overweight with a $640 target. Jefferies initiated Buy with a $580 target on 10-12. International Bookings growth has been the key for PCLN and the reason it deserves to trade at a premium. Priceline does trade weekly options and recently has seen a strong bullish bias with call premium purchased surpassing $1M a few days last week. The November weekly 525/550 1X2 call spread traded at $1 on Friday 315X630 contracts.
Trade to Consider: Sell the PCLN November $460 Puts at $10.50 and Buy the November $530/$550 Call Spread at $7.30 for $3.20 Net Credit (Risk = Willing to be Long Stock at $456.80 Cost Basis)
Result: This $3.20 Net Credit Trade Ends the Week at around $8.20, a huge winner
Rackspace Hosting (RAX) will report earnings Monday night after the close, and shares closed 2.23% lower last report, although were 14.75% higher intraday, and also closed higher the prior 4 reports. The chart is healthy, a recent break out at $38 that measured to $45 and shares closing last week at multi-month highs, under accumulation. The $5.57B cloud computing Co. is often considered a takeover target and trades at a hefty premium, 54X earnings, 3 PEG and 55X cash flow. BofA reiterated Buy and a $45 target ahead of the report, seeing Q3 acceleration and a modest beat. Option traders were recently busy on 11-3 with 5,000+ November $41 puts sold to open.
Trade to Consider: Sell the RAX November $42 Straddle at $4 (8 Straight Reports with Sub-10% Moves on the Close)
Result: RAX closes this week at $42.39 and this straddle could be bought back at $2.15, a strong gainer, or can allow more decay into next week
Fossil (FOSL) will report earnings Tuesday before the open, and shares have moved big on earnings recently, a 25.9% max move lower last report, closing 12.5% lower, and the prior quarter a 12.7% gain on the report. The $6B apparel Co. trades 17.55X earnings, 1.25 PEG, 2.65X sales, and 37.85X cash flow. Brean Murray cut shares to Hold on 10-31, and Benchmark cut to Hold on 10-28. On the chart shares failed to sustain a breakout past $105, and now sit above its 50 day EMA at $95, near a trend break that would send shares to $85 or lower. On 11-3 a trader sold 4,000 November $85 puts to open at $2, a willing long.
Trade to Consider: Long the FOSL November $95/$85 1X2 Put Spread at $1 Debit
Result: FOSL trade can be closed around $3 for a 200% gain, or hold another week and realize even more. Also, could close without buying back short puts as it is unlikely to see $85 next week and then the $4 close price is a 300% gain.
Sina Corp (SINA) will report earnings Tuesday after the close, and shares gained 3.55% last report, but fell more than 5.5% the prior 2 reports, averaging just above a 5% move on earnings the last 8 reports. The $5.5B Chinese Internet stock has spent the last quarter with concerns on increased Chinese regulations, and trades 50.7X earnings and 4X book, expensive, but a major growth name with Weibo, the Chinese Social media play. There is 10.9% of the float short. Maxim initiated shares a Sell with a $72 target on 10-17, while others see shares worth $140 or more if it spins off Weibo. On the chart shares have been making lower highs and lower lows, overall a bearish pattern and currently stuck below its 200 day EMA and declining 50 day EMA. The December 100 calls have been under accumulation in recent weeks with over 15,000 in Open Interest. Sina IV looks fairly rich considering the moves in recent reports, currently pricing in a 12.5% move on earnings with the weekly options.
Trade to Consider: Sell the SINA November $95/$72.50 Strangle at $4.90 Credit
Result: SINA strangle can be bought back at $1.20, but best to let expire and see the max profit as that range looks fair through next week
Weight Watchers (WTW) will report earnings Tuesday after the close, and shares have been volatile, tanking 22.8% last report at a point, and 10.3% the prior, also a 47.4% gain 3 quarters ago. The $5.55B Co. trades 16.75X earnings, 1.58 PEG, and 32.3X sales, also a 20.5% short float, 6.5 days to cover. Shares based along $55 for weeks, and recently have taken off back near highs. Auriga started shares Buy on 9-28 with a $71 target, a nice call, shares already trading well above most Street targets. On Friday traders purchased more than 3,600 November $70 puts around $2.60/$2.70 to open into earnings, and yet to see much action on the call side, options pricing in 12% movement for shares.
Trade to Consider: Long the WTW November 80/85 Call Spread and 72.5/67.5 Put Spread for $2.80
Result: WTW trade can be closed around $3.35 now, but was potential to close closer to $4 after earnings, a solid gain
Ralph Lauren (RL) will report earnings Wednesday 11-9 before the open, and shares have averaged max earnings moves intraday of more than 9%, and 5 of the last 6 positive moves. Shares of the $14.55B retailer trade 20X earnings, 2.4X sales and 34X cash flow, rich on valuation in my view. Macquarie started shares Neutral with a $148 target on 10-18. Shares of RL put in a shooting star top, closing deeply red after a break to all time highs last week, but riding its 20 day EMA higher, shares likely to stay in a $140 to $170 range near term. On 10-24 the November $140 puts were sold to open for 6,000+, some of which closed now, while November 165/170 call 1X2 spread bought 1,290X2,580 for a net credit.
Trade to Consider: Long the RL November 155/145/135 Put Butterfly at $1.65 Debit
Result: Shares moved lower to $147 and the spread was a strong gainer, and closed the week at $2, overall a nice winner
Nordstrom (JWN) will report earnings Thursday after the close, and shares have traded lower 4 of its last 6 reports, and last week fell on disappointing same store sales, but quickly rebounded off the 50 day EMA. Shares outperformed during the weak market tape in October, but have put in a rounded top pattern and the recent top showed bearish divergence on MACD and RSI. Shares trade 14X earnings, 1.05X sales and 19.23X cash flow. Macquarie started shares Outperform with a $60 target in October. Nordstrom open interest is high in November 50, 52.50 and 55 calls, including one large holder of 4,000 November 52.50 calls that rolled to that strike from October before expiration.
Trade to Consider: Long the JWN November 52.50 Calls at $0.85 or Better
Result: JWN disappointed, so the calls only worth about $0.10 here, still some time, or could roll out to December, a loser so far
Overall 6 winners and 1 loser, not a bad ratio!
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