10:00AM

(MSFT, $28.69, down $0.30) and Yahoo (YHOO, $26.22, down $0.21) continue to trade lower today. Microsoft lost $0.84 yesterday while Yahoo fell $0.37. With no deal in place in only makes sense that both stocks have suffered. I can only imagine what Microsoft’s “war room” is planning next. As each stock falls lower, Google (GOOG, $554.34, up $2.22) continues its uptrend (the stock was up $8 Monday) and has to be loving every minute of this battle.

MasterCard (MA, $265.62, up $23.12) is hitting 52-week highs this morning after reporting profits more than doubled during its latest quarter. I have been telling you that stocks can often see swings of 8%-10% or even 20% on earnings announcements. Yesterday, the stock closed at $242.50 and if you would have factored a 10% move either way you would have gotten roughly $266 to the upside and $218 to the downside. MasterCard is up nearly 10% today and the May 270 calls (MALEX, $6.80, up $4.20) are up 160%. On the other hand, the May 220 puts (MALQD, $0.20, down $3.30) fell 94% on the news. See why betting on earnings can be so risky? If you had predicted MasterCard’s stock would suffer after a lousy report or bad market conditions then you would have basically lost your entire investment overnight if you had bought the puts.

Now, if you would have placed what is called a “strangle” option trade and bought equal amounts of the May 270 calls and the May 220 puts, then you would have came out slightly ahead. The previous close of the calls were $2.60 and the puts were $3.50. This gives you a total cost of $6.10. If you were to sell both of these positions now, you would get roughly $6.80 for the calls and maybe $0.20 or $0.15 for the puts for a total of about $7.00. That’s roughly a 10% gain in one-day just by hedging your trade. Sure, it may not pack the power of getting you a 100%-200% gain but it also protects you from losing all of your money on a trade.

Sohu.com (SOHU, $70.82, up $0.01) was up $9 yesterday and I had mentioned that they may be one of the better China Internet plays. The May 70 calls (UZKEM, $7.30, unchanged) were up nearly 150% after earnings quadrupled on strong advertising and online game revenue. Online gaming continues to grow at mind-boggling numbers as online video games are expected to triple by 2012 according to some industry analysts.

One last tidbit…Ballard Power Systems (BLDP, $4.16, up $0.06) is a fuel cell manufacturer that makes equipment for hydrogen production. The company announced earnings this morning but the stock isn’t getting much of a pop. Hard to believe this was a $125 back in the day…

Rick Rouse
Rick@OptionsMentoring.com