Subject: Stock Option Trading Idea of the Week from Terry's Tips - How to Use Expectations to Prosper With Earnings Announcements

 

Terrys Tips newsletter
     

 Dear Friend,

This week I will offer a simple spread idea that could make 50% in a couple of days next week.  It will cost about $170 per spread to put on.

Also, if you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free! 


Terry

 
Option Tip of the Week


How to Use Expectations to Prosper With Earnings Announcements

The earnings season started just last week.  In my last Idea of the Week I recommended buying a straddle on JPMorgan (JPM), the first big company to announce this time around.  We made that trade in an actual portfolio for Terry’s Tips subscribers and closed it out for a 15%+ gain after commissions.

I also suggested an options strategy for JPM in a Seeking Alpha article - How To Play The JPMorgan Earnings Announcement.  In another Terry’s Tips portfolio  we placed calendar spreads as outlined in this article and closed them out for a gain of 15% after commissions even though the stock fell a little after the announcement while we were betting that it would go higher.

A wonderful thing about options is that you can be wrong and still make profits as we did last week in our JPM trades.  Terry’s Tips subscribers who followed both portfolios made over 30% last week, more than most people make in an entire year of stock market investing.

This week I wrote another Seeking Alpha article which checks out seven big companies which announce this week – How To Play The First Week Of The April Earnings Season.


The major message of this article is that the price of the stock after the announcement is more dependent on pre-announcement market expectations than the actual numbers that the company releases.  If expectations are too high, the stock will fall no matter how much the company beats the analysts’ projections.

Of the seven companies reviewed, SanDisk (SNDK) seemed to have the highest level of expectations.  Whisper numbers were 18.6% higher than analyst projections, the stock had shot up over 10% to a new high over the last week, and had moved 5% higher in the last week alone.  We believe that it is highly likely that some investors will “sell on the news” no matter how good it is, and the stock will either stay flat or fall after the announcement.

With the stock trading about $57.70, I am buying May 75.5 puts and selling April 55 puts. Implied volatility (IV) of the May options is 37 while the April options carry an IV of 70, nearly double the May number (this means you are buying “cheap” and selling “expensive” options).  Each diagonal spread would cost $163 to place at the natural option prices at the close on Friday.

Here is the risk profile graph for these spreads if you bought 20 of them, investing about $3400 after commissions (of course, you could buy fewer, or more, if you wished):



SNDK Risk Profile Graph


This graph assumes that after the announcement, implied volatility (IV) of the May options will fall from its current 37 to 30 which is more likely in a non-announcement time period.  The graph shows that when you close the positions on Friday, April 19th, a double-digit gain could be made if the stock holds steady, and could nearly double your investment if it fell about $2 ½ after the announcement.  A profit would result no matter how far the stock might fall in value.

We think the stock is likely to fall after the announcement because expectations are so unusually high.  If it moves higher, however, a loss could very well result.  Even in the world of options, there is no free lunch.  You need to take a risk.  We like our chances here.


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Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts.

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here.  Why wait any longer to make this important investment in yourself?

Even better, you can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account at the best options broker around - thinkorswim. Use this link to sign up - open thinkorswim account – and once you have funded your account with at least $3500, email Seth@TerrysTips.com and let him know that you have done it, and this is what he will do – sign you for our Premium Service package ($119.95 value plus an extra 4 months of our Premium Service, valued at another $190.80).  You get $300.65 worth of services without paying us one penny.

I look forward to having you on board, and to prospering with you.

Terry

 
  How to Use Expectations to Prosper With Earnings Announcements
 
Overbought/Oversold report
    Overbought/Oversold as of April 14, 2013

    • S&P 500 (SPY) – 73.7 (Neutral)
• Dow Jones (DIA) – 91.1 (Very Overbought)
• Russell 2000 (IWM) – 62.7 (Neutral)
• NASDAQ 100 (QQQ) – 81.1 (Overbought)
 
Testimonial of the Week

 

I have been trading the equity markets with many different strategies for over 40 years.  Terry Allen's strategies have been the most consistent money makers for me.  I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.”   ~ John Collins

     

Thank you again for being a part of the Terry's Tips newsletter. If you are interested in signing up as an Insider, visit Terry's Tips today for details.

Sincerely,
Dr. Terry Allen
Terry's Tips

 
 
Week 269
April 14, 2013
 
In This Issue
Option Trading Idea of the Week
Overbought/Sold Condition Report
Testimonial of the Week
Terry's Book

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