Can Lightening Strike Twice?

Watching WDC

Dear Bottarelli Research Member,

First and foremost, congratulations on your STX winner. This is the essence of how these earnings strangle plays work. First, you isolate a stock with the ability to make a large earnings-based move. Then, you confirm that the options string has strike prices in tight increments and appropriate pricing. And if everything checks out, you enter into a basket of plays (calls and puts) that position you to profit no matter if the earnings release pushes the stock higher or lower. Under the best conditions, the upside (or downside) move in the stock has enough momentum to push our entire basket into the profit zone.

As you know, we’re also positioned in Harley-Davidson (HOG – NYSE) using the combination of HOG February 25 Calls (HOG BR) and HOG February 24 Puts (JOZ NH). All told, we entered this basket for a total price of $2.10. As I write, the calls alone have moved up to $1.90 while the puts have held their water at $0.55, good for a total price of $2.45. That’s good for a 16% gainer leading into earnings. What’s nice here is that the CBOE floor traders refuse to drop the price of the puts, just in case HOG lays an egg and the stock pushes lower. Therefore, we just might be able to lock in a winner before tomorrow’s earnings report. I’ll continue to follow this position. If it makes sense to lock in a profit prior to earnings, you’ll be the first to know.

In the meantime, we just might have a nice opportunity to follow up on Seagate’s numbers by playing a new earnings strangle on Western Digital (WDC – NYSE). Similar to STX, Western Digital is a global manufacturer or hard drives. As you can see, the stock is using STX’s news today to move higher in advantage of their earnings report (which is scheduled for today after the close). So the big question is, can lightning strike twice? In other words, can two hard-drive makers report strong numbers on back-to-back days? I will closely monitor this situation, and if it makes sense to enter a new earnings strangle, you’ll be the first to know.

Now, let’s move onto Interoil (IOC – NYSE). The more I look at their news report from yesterday, the more suspicious I become. In a way, it looked like a fat lady at a milkshake parlor. That is, grasping for straws. As you can see below, the news-driven rally pushed IOC up yesterday despite broad-based weakness across the entire oil/energy complex. But interestingly enough, the upside move set a lower high, which is technically a bearish formation. With oil numbers out later this afternoon (which are expected to be soft), IOC could easily fall $5 to $10 over the next few days. Let’s hold onto our IOC February 70 Puts (IOC NN) for a little longer, just to see what happens.

And as always…

Lock and load!

Sincerely,