12:55pm (EST)
With earnings season winding down, the number and quality of possible earnings trades have been dwindling. Every Sunday night, we look at all of the companies reporting earnings for the upcoming week to see if there is a possible call or put option trade as a way to play the stock’s move.
Of course, there are a number of other factors that need to be considered when deciding to go long or short a stock, especially around earnings. Our main goal is to find stocks that are likely to move 5%-10% and use options to play the move to make a 100% return.
Option premiums can also get “inflated” on many high-beta stocks so it is also important not to overpay.
Some of the stocks we said to watch this week in our Weekly Wrap included Chef’s Warehouse (CHEF, $22.27, down $0.31) and PetSmart (PETM, $67.11, up $0.45) as short candidates and Foot Locker (FL, $42.38, up $0.01) as a long candidate.
Shares of CHEF and PETM have trended lower after their earnings announcements and FL will report their numbers ahead of Friday’s open.
We like the Foot Locker March 43 calls (FL140322C00043000, $1.00, down $0.05) as they have gained over 30% this week and could double if the company beats Wall Street’s estimates (and raises guidance). However, we will likely use the weather excuse to sit on the sidelines instead of taking this trade.
One trade we missed, and it is on a stock we have covered for years, was Staples (SPLS, $11.45, down $1.96). We have often shorted this name in the past and we had a feeling they would come up short when they confessed their numbers.
Staples reported full year earnings of $1.16 a share versus expectations for $1.22 a share. Sales were down nearly 11% year-over-year and the company said it will close 225 stores in an effort to concentrate more on internet sales.
The Staples March 12 puts (SPLS140322P00012000, $0.70, up $0.53) have zoomed over 300% after closing at 17 cents yesterday. This would have been a GREAT lottery trade as every $17 is now worth $70.
In other words, you could have bought 10 contracts yesterday for $170 and today they would be worth $700. A 100-contract trade would have turned $1,700 into $7,000 overnight.
As you can see, you don’t need to risk a lot of money to trade options as they are cheaper than buying a stock outright.
We feel jaded we missed this trade but there will be others coming up.
April is the next BIG earnings season as most companies wrap up their current quarters at the end of this month and will start to report their numbers the second week of next month.
We do have more good news from a current earnings trade that continues to perform well. Shares of World Wrestling Federation (WWE, $29.73, up $2.63) have been surging all week and have moved from just under $23 and are now pushing $30! With today’s surge, we are ringing the register on another quarter of the trade as it is now up 225%!
As we head from desk to press, the Dow is up 85 points to 16,445 while the S&P 500 is higher by 7 points to 1,881. The Nasdaq is gaining 10 points to 4,368 and the Russell 2000 is advancing a point to 1,207.
We could also have additional Trade Alerts this afternoon so stay close to your email inbox or follow us on Twitter.
Aruba Networks (ARUN, $21.06, down $0.12)
April 23 calls (ARUN140419C00023000, $0.65, flat)
Entry Price: $0.65 (3/5/2014)
Exit Target: $1.30
Return: 0%
Stop Target: None
Action: We believe shares could make a run past $25 and challenge its 52-week high of $26.26. Support is at $20.
Opko Health (OPK, $9.18, down $0.22)
April 10 calls (OPK140419C00010000, $0.50, down $0.10)
Entry Price: $0.65 (3/4/2014)
Exit Target: $1.30
Return: -23%
Stop Target: None
Action: We are expecting a surge past $10 over the next few weeks and a close above $9.50 would be bullish. Support is at $9.
Ingersoll-Rand (IR, $61.22, up $0.25)
April 62.50 calls (IR140419C00062500, $1.10, up $0.10)
Entry Price: $0.90 (2/27/2014)
Exit Target: $1.80
Return: 22%
Stop Target: 90 cents
Action: We have a near-term target of $64-$65. If reached, these options will easily double from our entry price. Support will try to hold at $60 on any pullback with $59 serving as backup.
Discovery Laboratories (DSCO, $2.68, up $0.03)
April 2 calls (DSCO140419C00002000, $0.85, flat)
Entry Price: $0.65 (2/24/2014)
Exit Target: $1.00-$1.30
Return: 31%
Stop Target: 60 cents
Action: Shares continue to climb higher after the break out of the symmetrical triangle but Friday’s close felt bearish. Support is at $2.50 but we are still looking for shares to test $3.
World Wrestling Federation (WWE, $29.73, up $2.63)
March 30 calls (WWE140322C00030000, $1.80, up $0.95)
Entry Price: $0.40 (2/18/2014)
Exit Target: $0.80 (3/5/14 closed half @ $0.80)
Return: 225%
Stop Target: 50 cents (Hard Stop on other half)
Action: Close another QUARTER of the trade at current levels. We can aim to close the final quarter position on a move above $30.
Kodiak Oil & Gas (KOG, $12.04, down $0.10)
June 13 calls (KOG140621C00013000, $0.80, flat)
Entry Price: $0.70 (2/13/2014)
Exit Target: $1.40
Return: 14%
Stop Target: None
Action: We believe the company is a takeover candidate that could get a bid north of $15. Resistance is at $12.50.
Ariad Pharmaceuticals (ARIA, $8.54, down $0.04)
March 10 calls (ARIA140322C00010000, $0.20, flat)
Entry Price: $0.95 (1/28/2014)
Exit Target: $1.90
Return: -79%
Stop Target: None
May 11 calls (ARIA140517C00011000, $0.75, flat)
Entry Price: $1.05 (1/28/2014)
Exit Target: $2.10
Return: -29%
Stop Target: None
Action: We are expecting a pop to $10 over the next few weeks but we are running out of time with the March calls. Support is at $8 with $7 serving backup.
Revenues should grow during the current quarter with the re-launch of Iclusig in the U.S. The company could also have a new drug debut in the second half of 2014 and why we also suggested longer-term options on this trade as well.
The water cooler talk is that Eli Lilly has made a “friendly approach” to buy the company and is willing to pay up to $20 a share. GlaxoSmithKline is also in the hunt along with Shire.
We have said there is a HUGE gap to fill on the stock’s drop from $23 to a 52-week low of $2. Eli is trying to get the company for cheap as it currently has a $1.25 billion market-cap.
Exact Sciences (EXAS, $13.86, down $0.53)
April 19 calls (EXAS140419C00019000, $0.50, down $0.10)
Entry Price: $0.88 (1/22/2014)
Exit Target: $1.75
Return: -43%
Stop Target: None
Action: Resistance is at $15 and a move above this level should get us back near even. Support is at $12.50.
The company should get some FDA news in March on its Cologuard drug. These are April options with 2 months until expiration and we plan to hold through the volatility because we want to be in when the March news is released. We do not have a Stop Limit listed.
Other 2014 Portfolio OPEN positions (5): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means we would not open any new positions. We are still keeping track of the trades and we will record the results, accordingly, when we close them or if the options expire. Click on the 2013Portfolio link in the Members Area to view ALL open/ closed trades.
Sony April 20 calls (from January 2014) – continue to HOLD
General Electric March 28 calls (from January 2014) – continue to HOLD
Caterpillar March 85 puts (from January 2014) – continue to HOLD
McDonald’s March 90 puts (from February 2014) – continue to HOLD
Apollo Education Group March 29 puts (from February 2014) – continue to HOLD
WATCH LIST SECTION
These trades are NOT recommendations. They are trades that we like but have not added to the portfolio as an official recommendation because of market conditions or because we are waiting for better entry prices. We try not to have more than 12-15 open trades at any one time and why we have a Watch List. We will not list entry prices because these stocks are on the verge of breaking out or they could sell off but these are the trades we are watching as new candidates.
We will update this section in the morning.
