Sometimes the best trades can be influenced by what the market is doing and with today’s bounce, which we will talk about in a minute, we were a little defensive on playing an earnings trade this week.
Trading a stock and options on an earnings announcement can be tricky because the bottom line could be good but the future forecast might not be. Companies can meet or beat numbers, disappoint and lower numbers, or miss numbers and predict higher growth down the road.
If you are unsure on what a company might say and you are playing an earnings announcement, there are still ways to double your money but you will need a huge move in the stock.
Here were our thoughts on Tuesday morning (quotes are from Monday’s close) for Men’s Wearhouse (MW, $29.21, down $6.36), a stock we felt certain would take a haircut after confessing their numbers to Wall Street last night. This trade appeared on our Watch List and we profiled a call and put option in case the stock bounced with the overall market:
“Men’s Wearhouse (MW, $35.13, up $0.57)
June 31 puts (MW120616P00031000, $0.55, up $0.10)
June 37 calls (MW120616C00037000, $0.70, down $0.20)
Thoughts: We wouldn’t expect Men’s Wearhouse to be hitting the ball out of the park but they have beaten estimates for 4-straight quarters. This makes the options a risky trade betting on direction. You can see the sharp selloffs and rallies on earning in the past from the chart below.” (END)
Today, shares are down nearly 20% and the June 31 puts are at $2.50 while the June 37 calls are at a nickel.
The total cost to buy both the calls and puts would have been $1.25 on Tuesday. This is known as a “strangle” option trade. Although the calls will likely expire worthless, the puts options are worth $2.50 which means that trade would have made 100%.
These types of option strategies can be golden when shares move double-digit percentage points but a move of less than 10% would have deflated the premiums and the results would have been much different. This is one of the reasons we stayed on the sidelines.
Men’s Wearhouse missed estimates and lowered their forecast going forward.
As far as Bernanke, the Fed Chairman didn’t say much as he talked about the potential problems facing the U.S. economy while side-steeping our exposure to Europe. Big Ben once again reiterated the Fed stood ready with additional “tools” in the shed but offered nothing material.
After a surge at the open, the market’s gains were cut in half as the indexes hit the second layer of resistance and stopped on a dime. The bulls are still pushing and we showed you some charts this morning on what to expect.
As we head to press, the Dow is up 102 points to 12,517 while the S&P is higher by a 6-pack to 1,321. The Nasdaq is showing a 5 point pop and is at 2,849.
Subscribers, check the Members Area for the current trade updates and stay locked-and-loaded for another New Trade in case we see something we like this afternoon.