OptionPundit

Category: Earnings

  • How to Trade Tesla Motors Earning

    Tesla Motors Inc (TSLA) will announce earnings after market close today. Undoubtedly TSLA has been THE MOMENTUM stock of the year so naturally the expectations are high. Shorts as percent of float is about 26.7% but based on short interest ratio it is roughly 1.6 days equivalent volume.

    Options are implying a move of $20 in either direction. 52wks high is $194.50 and 52wk low is 29.33. I am expecting a move of roughly $30 in either direction i.e. to 205/145. So how can one trade TSLA earnings using options? There are various ways. Some of the most popular ways are-

    • Buy a call or a vertical spread (If you are bullish)
    • Buy a Put or a vertical spread (If you are bearish)
    • Sell Straddle/Strangle (for a range bound move expectation)
    • Buy straddle/Strangle (assuming a much wider move than priced by options)

    And then there are more strategies that you may want to check out here.

    There is no easy pick. Whichever strategy you choose, there is a directional risk as well as implied volatility risk (if you are a volatility buyer).

    Here is one more alternative. It is called REVERSE IRON CONDOR. This trade makes money as long as the underlying makes a big move in any direction. If however, underlying doesn’t move by the expiration date, the trade will lose all the premium paid.

    Here is a trade structure for TSLA-

    • Buy to open Dec 165/160 Bear put vertical @2.10 AND
    • Buy to Open Dec 180/185 Bull call vertical @1.80
    • Total cost/maximum risk: $3.90/$5 spread
    • Maximum gains: $5.00-$3.90= $1.10 or +28%
    • Breakeven points 161.10 and 183.90

    TSLA Reverse Iron Condor

    What are the risks-?

    • If TSLA doesn’t move beyond 161.07 and 183.93 by Dec expiration, all the premium paid will result in full loss.
    • There is IV risk; however, if TSLA moves beyond those breakeven points, the trade will still be profitable.

    This is just one of the ways to trade earnings. You may structure a similar trade but use Nov-8 expiry or any other expiry set. The closer it is, bigger the impact on trade. There is a trade off with respect to time, move and implied volatility drop.  Or you may choose any other alternative strategy. There are numerous possibilities.

    Alternatively, if you think TSLA is not going to move as much, you might sell this condor vs. buying. Your gains will now be $3.90 for each $1.10 risk. Hers is how the risk reward chart will look like-

    TSLA Iron Condor Dec 2013

     

    Whichever strategy you choose, assume that earning event has 50/50 probability at best (for win/loss). If you are comfortable with this kind of ratio, only then you should think of going through earnings.

    Disclaimer– I don’t have any TSLA positions as of this writing. But I can change my positions any time without any prior notice. You should do your due diligence, consult your advisor, before investing any single dollar on any trade mentioned on this page/blog.

  • Get Ready for the Earning Season (2013)

    Earning seasons provides excellent trading opportunities especially for option traders. Before moving further, let me reinforce that earnings outcome is largely a 50/50 probability event. Stock prices move wildly depending upon various parameters and it’s very tough, if not impossible, for someone to make a sure speculation about the outcome of the event. Hence, generally speaking, almost every directional trade has only a 50/50 probability of being a winning trade. Even though earnings’ trading can offer phenomenal results, you should not trade earning event using options if you are not sure of what you are doing.

    During JAS 2012, I traded quite a few underlying for earnings (outcome is listed on the right side bar) but I slowed trading earnings during OND 2012 as I was expecting volatility environment not to be supportive. There were a lot of other factors that were making it challenging to play earnings and thus I traded earnings at minimum. Staying out of markets is a strategic choice as well. However, this season is going to be an interesting one as key companies are about to start reporting. On my list, I have about 118 companies that are going to announce earnings during next 10 days. Out of these 118 companies, ~80% of the companies already reflect implied move in accordance to the recent past. Besides implied volatility, outlook is also going to define how markets respond to earning announcements. Revenue will largely be miss in comparison to past announcements and I not very optimistic about the profit margins either.

    According to Zacks:

    The expectations on earnings have been steadily coming down over the last three months and are barely in positive territory now. Total earnings in the fourth quarter are expected to be up +0.4% from the same period last year. This is a sharp drop from the roughly +7% earnings growth rate that consensus expected just three months ago.

    Inspite of all this mumbo jumbo, only 3 companies out of 118 have consensus rating below 3 (none below 2.5) where 5 is equivalent of Strong Buy and 1 equivalent to Strong Sell!!

    One of OP alum, Kim Klaiman, has an earning focused newsletter called SteadyOptions. If you are looking for something on the earnings alone, you may want to check that out.

    During last earning announcement AAPL lowered EPS guidance to $11.75 vs. then estimates of $15.53 and revenue estimated were guided lower to $52 billion vs. then estimate of $54.95 billions. Current EPS estimates on AAPL vary from $12 to $15.50. I shall share a detailed review of AAPL separately. You may want to read some of my past reviews on AAPL earnings.

    Regardless, it’s going to be an interesting earning season. There will still be plentiful opportunity to trade and make some money from these uncertain certainties and I shall be sharing high probability traded in the coming days/weeks. Just to reinforce, earning trades are covered under OPNExtra! which is FREE for the OPN members and is not available for others.

    Value Delivered by OptionPundit Income Newsletter

    If you are not an OPNewsletter member, this probably will be one of the most interesting years to join. For those who may be interested in following me on Twitter, you can find @OptionPundit at Twitter.com/OptionPundit

    Happy Trading, OP

  • Earnings Preview Linkedin LNKD

    Linkedin Corporation (LNKD) is set to report its highly anticipated results today i.e. Aug 02 after the market close. In the social media/network landscape, Facebook (FB) and Zynga (ZNGA) announced poor results while Yelp (YELP) delivered beyond analysts’ expectations. Linkedin will therefore be watched with great interest. It competes with Monster (MWW) in the recruitment services market, as well as social networking portals like Facebook and Twitter.

    WHAT TO EXPECT:
    Analysts, on average, are expecting earnings of 16 cents per share on revenue of $215.2 million, according to a poll by FactSet. After dismal performance from Facebook (FB), Groupon (GRPN), Linked-in expected to show good results to keep faith in social media (at least short term). Since IPO Linked-in always beat the earnings during the past 4 quarter. So naturally the expectation is to beat again.

    OPTIONS’ TAKE:

    This quarter IV rise prior to earnings is in line with previous quarters. Currently index mean IV stands around 80% and post earnings, it might drop by at least 15-20 points.

    (more…)

  • Earnings preview Apple AAPL

    Apple (AAPL) is set to report its highly anticipated June results today i.e. July 24, after the market close. Besides Google (GOOG), Apple (AAPL) is another popular stock with option tarders to play earnings.

    What to Expect: According to briefing.com, here is what traders are expecting:

    The Street expects Q3 EPS to grow 33% year-over-year to $10.38 and revenues to grow 31% YoY to $37.43 bln. Not surprisingly, the Street estimates are above the company’s typically conservative guidance of EPS of $8.68 and revenues of ~$34 bln issued on the Q2 release (April). Yet the Street has set relatively low expectations with some analysts even anticipating a Q3 miss.

    Another expectation element is around iPhone5/ iPade sales. You may find information on that anywhere on the web so I won’t go into those anticipations.

    Options Take:

    AAPL IV SKEW

    This quarter IV rise prior to earnings is not as dramatic as it was during the last quarter when VIX equivalent IV of AAPL was at around 50. (Don’t trade AAPL earnings without reading this first).  The IV skew between Jul weekly options (expires this week) and Aug options is about 25%. Which is higher vs last quarter. Bottomline, premiums are elevated but not as much as it was during the last quarter and based on ATM implied volatility, options are pricing a $26+/- move and based on last quoted prices, a $605 (nearest ATM) weeklies’ straddle can be sold for $32.40 credit. Based on the past 4 quarters, AAPL has moved 8-10% during the last 2 quarters and about 3-5% during Jul/Oct 2011 quarters.

    (Sign-up for OP Monthly Income Newsletter; generating consistent returns for the past 5 years)

    Technical Take

    AAPL Daily Price Chart

    AAPL is again trending upwards with 20dma as support. 50dma is 579.54 and 200 days moving support is 502.33. All time high for AAPL was $644. So it seems that a range play between 550 and 650 could be a good one to trade. And in the most likely scenario either of the trend line will be broken which will set the stage for post-earning move. In the extreme highly unlikely scenario (remember CMG), the stock may move to $680 and $535.

    How to Trade:
    There are various ways to play earnings. One of the easiest trade is via option straddle or strangle. If you are a buyer, you risk is if stock doesn’t move big (uncertain) and Implied Volatility crash (Certain). If you are a straddle/strangle seller your biggest risk is stock move (uncertain) beyond your breakeven point (recall CMG). If you are fine with the probable range, an Iron Condor strategy could also provide a good solution. If you are an option trader, here are several ways on how you can trade google earnings with a good risk/reward ratio. If your outlook is that stock won’t move, you can also trade earnings via calendars spreads. However if you think stock will sure move, Reverse Iron Condor and/or selling Butterfly could result in nice gains too. Every strategy has its own pros-n-cons choose what you like based on your risk/reward preference.

    (Sign-up for OP Monthly Income Newsletter; generating consistent returns for the past 5 years)

    WHY DOES IT MATTER:
    Apple (AAPL) earning event is one of the events that can provide some exceptional gains in a very short period of time. CMG recently demonstrated the exceptional gains possiblity that are associated with earning events.

    WATCH-OUT:
    Keep in mind that earnings are always a 50/50 probability event and stocks can move in a much wider range than implied by either option market or forecast by charts.

    (Sign-up for OP Monthly Income Newsletter; generating consistent returns for the past 5 years)

    Trade carefully, Trade profitably, OP

  • Earnings Preview: Google

    Google (GOOG) is expected to post higher earnings and revenue when it reports its second-quarter results on Thursday July 19th after market close. This is surely going to be an interesting quarter as Google will post results combined with Motorola mobility. It will also be interesting to observe if Facebook (FB) did impact its business in any meaningful way.

    WHAT TO EXPECT: Estimates vary depending upon which research house you consider. Using msn/money data, consensus estimate is $8.78 per share (+14.56% vs. Year ago) and $37.48 (+25.9% vs. YA) for the full year. During last 8 quarters, GOOG missed earnings 3 times. Since 2005, July announcement missed earnings 3 times. So chances of a beat or missed are mixed, at best.

    Out of 32 analysts covering Google, 26 are rating as strong buy.

    OPTIONS’ TAKE: During the past two months, implied volatility has rallied by 50% to 30% level. Part of the rise in IV can be attributed to stock price drop, still at 30% level it is in line with previous earning announcements. The IV skew between July and Aug options is almost 40-45%. While it may sound a lot of skew, it is similar to previous announcements.

    Though option market is implying a $28+/- move post earning, July ATM ($575) straddle can be sold for $34.30.

    (Sign-up for OP Monthly Income Newsletter; generating consistent returns for the past 5 years)

    TECHNICAL TAKE: Here is the 5 year weekly price chart for Google-

    Monthly Pivot support is at around $545; $550 is also a supporting trend-line. On the upside $593 is resistance pivot and $608 is the next fib resistance level. Unless the report is very dramatic on either side, it seems that 550-600 is a good range to play.

    If however, 550 breaks, 530 seems a likely pause. On the upside 620-625 will be most likely secondry resistance areas.

    HOW TO TRADE – There are several ways to trade google earnings. I have been trading Google earning for almost 20 quarters with reasonable amount of success. If you are an option trader, here are several ways on how you can trade google earnings with a good risk/reward ratio.

    (Sign-up for OP Monthly Income Newsletter; generating consistent returns for the past 5 years)

    WHY IT MATTERS: Google earning event is one of the events that can provide some exceptional gains in a very short period of time.

    WATCHOUT: Keep in mind that earnings are always a 50/50 probability event and stocks can move in a much wider range than implied by either option market or forecast by charts. For you information, during the last quarter, Google hardly gapped and those straddle seller did collect some excpetional gains.

    Trade carefully, Trade profitably, OP

  • Will You Trade Apple Earnings Like Warren Buffett Traded Burlington Northern?

    Apple (AAPL) is scheduled to report earnings on April 24th. I have already shared some interesting things about this quarter that you may want to read before playing Apple earnings (Please read to get on-board).

    So, assuming you want to trade AAPL earnings, you need to answer following (for this earning announcement only) –

    1. Are you Bullish?
    2. Are you Bearish? or
    3. Are you Neutral and don’t care whether Apple drops or goes up after earnings, but you still want to trade without a directional bias?
    4. How much will Apple move? Whether bullish, bearish or neutral, you need to decide how much Apple can move. For this article, I shall assume that Apple might move +/-$40 (this doesn’t mean that I think it will move by $40)

    Let’s discuss the the BULLISH case.

    This assumes that you are an Apple fan, you believe in the company and you want to add to your previous purchases. You are a long term investor. You are in no hurry though.

    You could do it via followings-

    1. Buy 100 Apple shares @ $573, your investment risk is $573×100= $57,300; If Apple goes up $40, you make 40×100=$4,000 i.e. $4,000/$57,300= +6.98%; if it drops $40, you lose $4,000 or -6.98%. But since you are a long term investor, you don’t really care for short-term “fluctuation” because you know Apple business is worth more than $573/share and you have enough margin of safety at $573.
    2. You can buy ITM, ATM or OTM weekly, next month, or LEAP call options to lower your cost. For simplicity, let’s assume purchase of only 1 contract of May’12 $500, $570 and $640 calls which costs $7,980, $3,120 and $865 respectively (as of Friday April 20, close). Assuming post earnings, Apple goes up $40 and IV drops by 10%, the $500 call be worth ~$12,000, $570 call will be ~$5,200 and $640 calls will be worth ~$1,500 (post earnings) and ~12,000, $4,300 and $0 respectively on May 18th expiration close. By playing via call options you are leveraging your capital. As you know leverage is a double edged sword. So, if Apple drops by $40, the leverage will work against your trade, incurring greater losses.

    There are many others option strategies to go long but for now let’s focus on these two popular ones. Clearly both the strategies have their own advantages and disadvantages.

    Here is the 3rd alternative, (more…)