AutoZone (AZO, $143.60, up $1.72) continues to defy critics as its stock races towards fresh 52-week highs. On Monday, the stock hit a high of $148.50 on a day the Dow tanked 250 points. I know people are holding off buying new cars but is AutoZone’s benefiting that much?
We were pretty successful in an AutoZone put option trade before earnings a little over three months ago. We rode the stock down on November 19 when it was at $100, all the way to $85 a few days later. The December 75 puts that were profiled went from $1.80 to over $6.00.
Since then, the stock has added 60 points.
The company announces earnings on March 3 and I would hate to step in from of a train with the stock making news highs. So what do we do?
Well, it’s all but certain AutoZone is going to make a huge move between now and then. Specifically, the stock could move $15 or move after announcing earnings. That is based on a 10% move in the stock either way. If those assumptions come true, that would leave the stock at $160 or $130.
The March 160 calls (AZOCL, $2.30, up $0.30) are up 15% today while the March 130 puts (AZOOF, $3.90, down $0.40) are down about 10%. If you bought both of these positions it would be considered a straddle option trade.
This is usually a good strategy if you expect a large movement in the price of a stock, but don’t know whether the price will go up or down. With the release of AutoZone’s quarterly results next week, I’m pretty sure we get at least a 10% swing.
Since we are buying options, this long straddle (short straddles are when you sell options), will profit no matter which way the price of the stock moves, providing the stock moves 10% or move. If the price of the stock goes up, the call options should double and we would take a loss on the put option. If the stock goes down, the put option should do well while the call option would suffer.
As you can see, the puts are more expensive than the calls based on “15 strike” move from where the stock is currently at. The beauty of the long stradle trade is that you can possibly make money on the way up and then make money on the way back down or vice versa. These type of plays have worked well in the past for us and I don’t see why this one won’t. There may be an opportunity to play AutoZone straight up after I get a better feel for where the stock is headed but for now, this is the safer way to play the trade.
Rick Rouse
Rick@OptionsMentoring.com
