1:25 p.m. (EST)
During a recent visit to Arlington, VA, I had the chance to visit The Container Store (TCS, $24.39, down $2.68) and my first impression was the company was paying a lot of rent to sell goods that aren’t too impressive.
The stores are big but full of low-priced items that help you store, organize, and help make life less cluttered. Needless to say, I started doing some homework over the weekend as I saw they were announcing earnings this week.
I was pretty excited to see the company losing money and shares were near 52-week lows. To me, this seemed like a great setup for a short position as they were expected to report another loss for the quarter.
My thought process was the company could have an even wider earnings miss while lowering full-year guidance. Bingo. The loss of 7 cents a share was a penny more than expected while revenue of $173 million missed Wall Street’s estimates by $1 million. They also lowered full-year guidance.
Shares took a beating in after-hours trading last night and were down 18% to $22.26. This morning, the stock opened at $23.01 and traded down to $22.88 before bouncing back.
The July 25 puts (TCS140719P00025000, $1.20, up $0.40) closed Tuesday’s session at 80 cents on heavy volume as over 2,000 contracts traded hands.
As you can see from the Yahoo Finance quote below, these options opened at $1.95 and traded to a high of $2.30. At current levels, the trade is still up 50% but by setting limit orders to exit at $1.60 or better, some traders easily doubled their money.
I apologize for not getting this trade out but I had eye surgery on Tuesday and literally had trouble seeing. Although it was disappointing to miss the trade, I am even more excited to be able to see.
For those of you suffering from cataract, do yourself a favor and get the surgery done. It is amazing to be able have the vision you once did when you when in your 20’s. It is a 10-minute painless procedure and you will not need glasses afterwords if you upgrade the lens.
I was a little “young” to have the surgery but after 20 years of reading and researching Wall Street and trades, my eyes took a beating.
It is rare that I am away from my desk during market hours but yesterday I was. I apologize but life is so much better now.
I wanted to show this earnings trade and some of the thought processes I use to finding the best options to trade on these types of violent moves.
I try to keep option trading simple and it works like this. Usually, a 5%-10% move in a stock translates into 100+% return with the right near-term options. The time frame is anywhere from a day to 3 weeks I’m looking for a stock, or the market as I use options to play the indexes, to make a move.
I try not to take a lot of earnings trades because they are tricky. A lot of factors have to go right and sometimes it’s best to use strangle option trades when earnings are in play.
I like to use momentum, technical, and fundamental analysis to find the best trades. It also comes down to your “gut feeling” when it comes to predicting how a stock will trade after earnings.
If The Container Store had beat estimates and raised guidance, this trade might have been a 100% loser.
These are the risk/ rewards to playing earnings but you can make better decisions by doing some boots-on-the-ground research and homework.
Stay locked-and-loaded because there will be a few earnings trades I will recommend over the next few weeks. Also, some of the current trades that weren’t “earnings” trades when I recommended them in June will become earnings trades as their numbers come into focus later this month and into August.
Turning to the market, the bulls are seeing green today as the indexes are bouncing back off the weekly lows.
The Dow is up 41 points to 16,947 while the S&P 500 is gaining 5 points to 1,969. The Nasdaq is higher by 20 points to 4,411 and the Russell 2000 is advancing a half-point and is stuck on 1,172.
I do not have a new trade for the Daily today but maybe tomorrow. I do have a New Trade for the Weekly Wrap along with a Profit Alert coming later this afternoon. For those of you that aren’t subscribed to this publication, it’s time to get on board. The Weekly Wrap portfolio Is now 20-4 (83%) for 2014 (105-11, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk.
Subscribers, check the Members Area for the updates.
Closed Trades for 2014: 66-33 – the Weekly Wrap is 19-4 (83%) for 2014 (104-11, or 90% win rate, since 2011) and is designed for traders that want to use options with less risk. All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
Do not risk more than 5% of your trading account on any one trade but do try to take ALL of the trades. Please remember, ALL “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless we list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position OR if a new trade comes out. Otherwise, follow instructions at all times in the 9am and 12pm-1pm updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
Fortinet (FTNT, $24.29, up $0.48)
September 28 calls (FTNT140920C00028000, $0.55, up $0.10)
Entry Price: $0.55 (6/30/2014)
Exit Target: $1.10
Return: 0%
Stop Target: None
Action: Shares are back above $24. Earnings are due out at the end of the month and I believe they will announce a blowout quarter.
Rambus (RMBS, $14.11, up $0.05)
August 15 calls (RMBS140816C00015000, $0.45, flat)
Entry Price: $0.60 (6/30/2014)
Exit Target: $1.20
Return: -25%
Stop Target: None
August 16 calls (RMBS140816C00016000, $0.30, flat)
Entry Price: $0.33 (6/30/2014)
Exit Target: $0.65-$1
Return: -24%
Stop Target: None
Action: There is further risk to $13.75-$13.50 on a drop below $14 while a close above $14.25-$14.50 keeps $15 in play.
Earnings are tentatively scheduled for next week but there is no hard date listed. I believe the company will beat estimates so I don’t mind staying long.
General Motors (GM, $37.85, up $0.27)
September 32 puts (GM140920P00032000, $0.20, down $0.05)
Entry Price: $0.40 (6/23/2014)
Exit Target: $0.80-$1.20
Return: -50%
Stop Target: None
Action: I would like to see a close below $36 this week. Resistance is at $38.
Limelight Networks (LLNW, $2.92, up $0.06)
September 3 calls (LLNW140920C00003000, $0.35, flat)
Entry Price: $0.15 (6/4/2014)
Exit Target: $0.45 (closed 1/4 at $0.35 on 7/8/14)
Return: 133%
Stop Target: None
December 3 calls (LLNW141220C00003000, $0.45, flat)
Entry Price: $0.20 (6/4/2014)
Exit Target: $0.60 (closed 1/4 at $0.45 on 7/8/14)
Return: 125%
Stop Target: None
Action: I would like to see shares clear $3 again this week. Support is at $2.75.
Other 2014 Portfolio OPEN positions (2): 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 I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly, when the trade closes or if the options expire. Click on the 2014 Portfolio link in the Members Area to view ALL open/ closed trades.
McDonald’s July 95 puts (from May 2014) – continue to hold – shares are on the verge of falling below $100 but the options are running out of time.
Apollo Group August 23 puts (from April 2014) – continue to hold – shares closed below $30 yesterday.