Trade Summary: April 21, 2014

| April 21, 2014

April 21, 2014


Trade Rationale

We’re in the heart of earnings season, so that means there should be plenty of opportunities for options traders.  You see, earnings season tends to bring with it lots of big moves within individual equities.  That’s because there are always plenty of earnings surprises.

Every quarter, analysts project expected earnings per share and revenues for all the major companies.  What the public sees is typically a consensus estimate of all those analysts’ projections averaged together.  As such, there is a fairly large margin for error.  And typically, any positive or negative earnings or revenues surprise will elicit a large move for any given company.

Think about it – there are so many variables to consider when attempting to predict earnings.

There are external risks, such as macroeconomic and geopolitical risks.  There are concerns over the weather, interest rates, spending habits, political decisions, and much more.

And then there are the internal considerations.  Is a new product coming out?  Is the new marketing campaign working?  Are there one-time costs that hit during the quarter in question?  Are profits going to be reinvested or distributed as a dividend?  These variables are nearly endless.

So, it’s easy to see why earnings results can be so unpredictable – as well as investors’ reactions to earnings. We’re going to take advantage of overreactions or under-reactions to three different earnings situations that have recently occurred.

To start with, we’re going to grab calls in Google (GOOGL).  Google’s recent split finally makes options on the stock more affordable, although we still have to go pretty far out of the money to get to a reasonable price.  However, it’s worth it given how much the stock has sold off since earnings.

Basically, the company posted higher costs than expected, mostly because of its acquisition of Nest.  I believe this a temporary situation.  As Google adjusts its strategy to mobile technology, the company’s results will improve in the months ahead.

On the other hand, there’s IBM (IBM) – a stock that has farther to fall.  IBM posted another negative earnings surprise as the company’s hardware is seeing lower demand.  That’s a situation that isn’t likely to change.  Software and cloud-based solutions are significantly lowering demand for hardware across the globe.  IBM will need to adjust, and it’s not going to happen in the near future.

Finally, Yahoo (YHOO) was a recent example of a positive surprise.  The company beat earnings expectations and the stock jumped.  However, I believe it will continue to climb.  You see, the strong growth was mostly due to the company’s stake in Alibaba and other non-core holdings.  YHOO’s core business is still extremely cheap in valuation terms.  At some point, investors will catch on to this fact and bid up the price.

So that’s s three different earnings situations and three trade opportunities.  Keep reading for the details of each trade.


Trade Details

#1) Buy Google (GOOGL) June $610 Calls up to $3.00

We’re looking for GOOGL to move higher.  Our first profit point for conservative traders is at $575.  For aggressive traders, you can hold up to $600.  Regarding risk control, the conservative exit level is $515.  $500 is the final exit level for aggressive traders.


#2) Buy IBM (IBM) July $180 Puts up to $2.75

With this trade, we’re looking for IBM to head lower.  Our first exit point for conservative traders is at $184.  For aggressive traders, you can hold down to $175.  For risk control, the conservative exit level is $200.  And, $205 is the final upside exit level for aggressive traders.


#3) Buy Yahoo (YHOO) July $38 Calls up to $2.25

In this case, we want YHOO to go higher.  Our first profit-taking exit point for conservative traders is at $40.  For aggressive traders, you can hold to $43.  For risk control, the conservative exit level is $34.  $32 is the final exit point for aggressive traders.



Category: AOA Trade Summary