Another Earnings Preview

Watching CYOU, AFL, CTRP, CMI

Dear Bottarelli Research Member,

Looking at our current positions, we’re holing a basket of SNDK February 31 Calls (SWF BF) and SNDK February 28 Puts (SWF NB) leading into their earnings report this afternoon. As I write, SNDK is weaker going into this earnings report, as noted by the chart below. When entering this earnings basket we biased our strangle position to the downside, which looks to be the right move. If SNDK drops down to $26.00, which is possible from today’s chart formation, we’ll be positioned to lock in a nice return. But if SNDK gaps up, we’ll also have protection with our calls. Hold this play leading into earnings. Hold.

In other news, we’re not having a fun time holding our ICE February 105 Calls (ICE BA) or our MOS February 60 Calls (MOS BL). While I remain bullish on both stocks, especially at these reduced levels, the weak market action is making it difficult to maintain these plays. If you adhered to the stop loss, then you made the safe play. But if you’re still holding, I’ll continue to monitor each play. Since both stocks are now hitting an interim support level, we just might see a bounce after all. If so, we’ll get a better opportunity to trim our losses by selling into a bounce. I’ll keep you updated.

Also, continue holding your protective DXD March 30 Calls (DOF CD). We entered these calls earlier today for $2.15 and they’ve already ticked up to $2.50, good for a quick 16% gainer. Maintain this protective play for more gains. Hold.

Now, while we have a moment, let’s take a quick look at the companies that are reporting earnings next Monday and Tuesday. After thoroughly reviewing the entire list, the following names below best fit our criteria for an earnings strangle position. Similar to what we’ve done before, I’ll offer you all of these candidates now and, should the time come to make a new play, you’ll be ready to go without any further explanation. Here’s the run-down…

Changyou.com Limited (CYOU – NASDAQ)

• Earnings: Monday, February 1^st (Pre-market)
• Beta: Unknown Reading
• $1.00 Strike Price Increments
• Earnings Strangle Potential: Good

NOTE: What I like about CYOU is that it just IPO’d last April, so floor traders don’t know exactly how to price it yet. That’s the only reason I rate the earnings strangle potential at “good” instead of “strong.” But honestly, this could set up a nice opportunity for us to exploit any mis-pricing due to lack of historic information on the stock’s reaction come earnings day. Just to you know, CYOU develops online games in the People’s Republic of China, and this sector always seems to spark large price moves.

AFLAC (AFL – NYSE)

• Earnings: Tuesday, February 2^nd (Post-market)
• Beta: 1.97
• $1.00 Strike Price Increments
• Earnings Strangle Potential: Strong

Cummins (CMI – NYSE)

• Earnings: Tuesday, February 2^nd at 10:00 AM ET
• Beta: 2.12
• $1.00 Strike Price Increments
• Earnings Strangle Potential: Strong

Ctrip.com International (CTRP – NASDAQ)

• Earnings: Tuesday, February 2^nd (Pre-market)
• Beta: 2.10
• $2.50 Strike price Increments
• Earnings Strangle Potential: Good

TRADING NOTE: In case you haven’t heard, a major change to options symbols will take place on February 1^st, 2010, and will affect the display and format for all U.S. Equity and Index Options. This change was mandated by the Options Price Reporting Authority (OPRA), which means that it’s an industry-wide event. The purpose of this change is to more effectively manage the option root and strike price codes. For example, as more and more companies merge, split, or spin off into new companies, the major options exchanges find themselves scrambling to list updated options codes while also facilitating easy and liquid trading. Since these events occur in the middle of a trading session, the complications become incredibly troublesome for the exchanges and frustrating for the options holders.

To be honest, this change does not look to be more beneficial for individual traders like you and me. In my view, it looks to be something that’ll only help the exchanges. But at any rate, we have to deal with it. Some brokers have already moved into using the new symbols before the February 1^st changeover date. But to maintain consistency, I will continue using the “old” symbols until everything officially changes over next Monday.

Now, in an attempt to keep you updated on this change, here is a run-down of what it’ll mean…

Current Symbol Formats: There are two formats currently being used for options data. The “short form” uses an option root symbol and special month and strike price codes. For example, MSQ DE. The “long form” uses an option root code, but instead of codes, the month and strike prices are spelled out. For example, MSQ APR25C.

New Symbol Format: Starting next month, the new format for options will use the full underlying symbol, a two-digit year code, the combined put/call and month code (refer to the list below), and then the full strike price spelled out to the hundredths. The format will read like this:

[Underlying Symbol] [Two-Digit Year][Put/Call and Expiration Month Code][Strike Price]

For example, an IBM July 100 Put would be: IBM 10S100.00

The “10” represents a 2010 option, and the “S” represents a July Put (taken from the list below). The 100.00 represents the strike price. We’ll need to get used to this new format. The biggest challenge, in my view, will be applying the new symbols from the chart below into the options codes. As always, I’ll do my best to keep you fully informed on how to place these orders. Feel free to print this list out and use it as a reference going forward.

In addition, you might also see an optional regional ID code and an exchange day identifier, used for quarterly, weekly or any other expiry other than the third Saturday of each month. At this time, I do not plan on trading these alternative option expirations. But just so you’re aware (and do not mistakenly buy one of these contracts), the format for these symbols will be:

[Underlying Symbol] [Two-Digit Year][Put/Call and Expiration Month Code][Strike Price][Day Identifier][=Regional Exchange ID]

For example, DIA March 30, 2010 74.00 Calls with quarterly expiration traded on the Boston exchange would be: DIA 10F74.00D30=B

Yes, that looks a lot more confusing to what we’re used to. But as I said, I’ll do my best to keep you fully informed on these new symbols. Luckily, we don’t plan to trade the options with various expiration dates, which should eliminate some added confusion.

NOTE: From what I’m hearing with most quote providers, this conversion process is not automatic. Therefore, you’ll need to enter in your symbols manually to correspond with the new format. For assistance, do not hesitate to contact your broker for help with these new symbols. Below, you’ll find the chart that will be used for all the new options symbols.

I hope this helps prepare you for the transition next Monday.

And as always…

Lock and load!

Sincerely,