Earnings Strategy, Continued
Add GMCR
PLAY: Buy more GMCR February 85 Calls (QGM BQ) at market, good for the day.
PLAY: Buy the MOS February 60 Calls (MOS BL) at or under $2.90 (or best price), good for the day. Place a protective stop limit at $1.60 and a sniper sell at $4.10.
Dear Bottarelli Research Member,
Good morning. Let’s begin the day by using this slight dip in Green Mountain (GMCR – NASDAQ) to add to our position. As you know, we entered the GMCR February 85 Calls (QGM BQ) for $4.20 to get positioned for a pre-earnings run-up. With GMCR set to report their numbers on Wednesday (after the close), I want to keep us positioned in a way that’ll use any upside run to lock in profits.
This morning, GMCR traded higher, but then quickly reversed. This looks like a classic market-maker trick designed to scare investors out of the company just before earnings. We witnessed a similar move on Amazon.com just before they reported their blowout numbers back in October. This is one of the oldest tricks in the book, and I want you to benefit from it alongside the market makers. In that spirit, add to your GMCR February 85 Calls (QGM BQ) now!
PLAY: Buy more GMCR February 85 Calls (QGM BQ) at market, good for the day.
At the same time, my staff and I are also watching potential support points on Mosaic (MOS – NYSE) and Freeport-McMoRan Copper & Gold (FCX – NYSE). If the commodity sector picks up, both stocks could blast off quickly. In fact, while preparing this alert, MOS has shot higher. Add MOS February calls and play a breakout now!
PLAY: Buy the MOS February 60 Calls (MOS BL) at or under $2.90 (or best price), good for the day. Place a protective stop limit at $1.60 and a sniper sell at $4.10.
At the same time, we’re continuing to hold our SSO February 38 Calls (SUC BL), which positions us to profit off an upside push (like we’re seeing today). We’re also positioned in the VMW February 45 Calls (VMW BI) and VMW February 43 Puts (MKT NH) leading up to their earnings report after the close today.
Ideally, we’ll be able to sell our puts for over $4.00, which pays for the entire cost of the position. Then, we’ll hold a free call going into their earnings announcement. Depending on how today’s trading goes, I’ll help you to manage this position in the most profitable manner.
We also have the IOC February 70 Puts (IOC NN), which are slowly coming back to us. And finally, we have the HOG February 24 Puts (JOZ NH). If you recall, we sold the HOG February 25 Calls (HOG BR) for $0.75, which leaves us holing the HOG puts with a break-even price of $1.35. Currently at $1.15, we’re just about ready to get into the black. Hold.
EARNINGS STRATEGY NOTE: While we have a moment, I wanted to talk about the market psychology behind earnings announcements. Our two recent plays on Seagate Technology (STX – NYSE) and Western Digital (WDC – NYSE) offer a perfect example. If you recall, both companies operate in the exact same business segment: hard drives. STX reported earnings first, and they wowed investors with a net income of $533 million, completely reversing their loss of $2.82 billion in the year-ago period. Seagate earned $1.05, which came in well ahead of the $0.65 estimate of Thomson Reuters. In response to this, shares of STX popped 10%, and we used the move to lock in a nice 39.13% gain on our STX February 19 Calls (STX BY) and STX February 17 Puts (STX NS).
A day or two later, Western Digital reported equally powerful earnings. They reported earnings of $429 million ($1.85 per share), which was way up from the $14 million ($0.06 per share) they earned in the same period one year ago. These results easily beat the Thomson Reuters estimates of $1.36 per share. But in contrast to STX’s up-move, shares of WDC moved lower by $0.40 in pre-market trading. And then, they ended up drifting $4.00 lower for the entire trading session. As a result, we had to dance around with our combination of WDC February 43 Puts (FJI NQ) and WDC February 46 Calls (FJI BT). After entering this basket for a total of $3.00, we ended up selling the calls and riding the puts down. As it turned out, we squeaked out a total sell price of $3.06.
CONCLUSION: From these two examples, it’s clear that you can never get a good sense of how a stock will react on earnings day. I’ve seen it countless times. A stock reports great numbers, but falls hard. Or, a stock reports horrible numbers and rallies. It’s always a flip of the coin. That’s why playing a well-timed strangle position of calls and puts makes the most sense. As long as you get a large enough move up or down, you’re positioned to hit a winner ranging between 25% and 65%. Sometimes you’ll even see a 100% gainer. But on the flip-side, if you do not see a large enough move, we can often times trade out of the position for a break-even (like WDC) or a slight loss. All told, a properly timed earnings strangle offers gains ranging from 25% to 100% while limiting losses to 10% to 20%. In the world of trading, I’d take that risk-to-reward skew any day of the week!
As always, I’ll keep you fully informed on any new trades. Until then…
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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