Aloca (AA) is set to announce earnings after close today. Wall Street is expecting a fall to -$0.55 to -$0.57 EPS depending upon who do you follow (Zacks, First Call etc). The quarter was not that exciting, hence the expectation are already factored for a very poor quarter. I think the movement will depend on the extent of swing of losses in either direction. My personal bias is that will beat these lowered numbers (probably on ground of higher discounts to liquidate inventory, etc.) . Worth watching though is the Gross/operating Margins.
Earnings related trades are speculative and hence there is 50/50 chance of being correct. So, How to play this?
Earlier I mentioned about a beautiful strategy to play large moves, called “Backspread” strategy. Here is a Trade Idea-
While I would like to play upside I also want to protect myself for any negative announcement and hence negative stock reaction. I am planning to open a April 6/7.5 2:3 Call ratio spread i.e. Sell Apr Calls 2X and Buy April 7.5 Calls 3X. This will yield about $1.50 credit. The Max I can lose by April expiration is $150. My break even points are $6.73 and $9 by April expiration. As long as AA moves beyond this range, this trade will be able to make money.
What’s the catch– Tomorrow morning the IV will drop like a stone as the news will be out and stock will move. The worse case, the IV drops and stock doesn’t move. For this trade to make money, stock has to move.
There are other ways to book profits. For instance, if AA drops heavily then close the 6 calls buy buying it back cheaper and sell the 7.5calls when AA bounce a little upwards. But this all requires intra day trading skills/maneuvering.
Don’t try this if a) you are not willing to lose and b) you don’t how to profit from it even if it goes against your plan.
Disclaimer– As of this writing I own this spread. I may change my position anytime without notice.
Profitable Trading, OP
Leave a Reply