12:20pm (EST)
We have been mentioning our Weekly Wrap research and our earnings section a lot lately as we have profiled a number of triple-digits winners over the past few weeks and months.
As the last of the 3Q earnings cycle trickles down over the next few weeks, the focus will be on 4Q profits and full year outlooks for 2014.
The pickings have been slim but we focused on a few trades this week as possible candidates for our Daily as these can be one-day trades. We do not trade earnings for our Weekly Wrap so we try to bring the best candidates over to the Daily.
The risk/ reward is simple. Usually when a stock moves 5% or more, the near-term call and put options can zoom 100% or more. It is that simple and something we talk about in our option trading manual, How to Trade Options on Momentum Stocks.
Of course, if the stock moves in the opposite direction of your bullish call play or bearish put trade, the results can mean losses of up to 80%-100%.
The bigger picture is also realizing when a stock moves 10% or more the right option can return 200% or more. A pop or drop of 15% in a stock can earn gains of 500%-1,000% with the right option. Seriously.
There are a ton of factors that go into picking the right option and we thought it would be helpful if we explained some of our trade setups for you as we prepare for the upcoming release of our 2014 option trading manual.
The one trade for Tuesday we liked was on Jabil Circuit (JBL,$15.51, down $4.20). We have followed the company for years (which is also important) so we know the company’s earnings history and how shares react.
We do our research over the weekend and on Sunday night in our Weekly Wrap here is what we said along with our chart work (quotes from 12/13/13 close):
Jabil Circuit (JBL, $19.07, down $0.03)
January 18 puts (JBL140118P00018000, $0.40, flat)
Thoughts: We have been bullish on JBL in the past but shares look like they could drop below $18 if earnings come in below expectations.
The company came in with a miss after reporting a profit of $0.51 versus expectations for $0.54 a share. The 3-cent miss was bad but worse was the fact Jabil lowered current quarter guidance to $0.05-$0.10 a share on revenue of $3.6 billion. The suit-and-ties were expecting earnings of $0.52 a share and revenue of $4.3 billion. Nasty.
Needless to say, the stock is getting pounded like a porn star and has fallen to the mid-teens.
As you can see from the chart below, the January 18 puts (JBL140118P00018000, $2.50, up $0.25) have zoomed 900% today after closing at 25 cents yesterday.
The cost to do this trade would have been $250 if you had purchased 10 of the January 18 calls ahead of yesterday’s close. At current levels, the position would be worth $2,500. A 100 option contracts could have turned $2,500 in a cool $25,000 in less than 24 hours. The cost to a monthly subscription to our newsletter is just $97.
We also looked at the December 18 puts (JBL131221C00018000, $2.50, up $2.35) but they expire this Friday so the risks were far greater on a 15 cent option than the 40 cent option as they would have expired worthless had shares stayed above $18 on an earnings beat.
Although this wasn’t an official trade, we hope our thought process explains how our newsletters work and how lucrative earnings can be. We will be doing a video soon before 4Q earnings come out and start the second week of January. We are still adding important information to our option trading manual and while we were hoping to have things wrapped up this week, they will probably start to ship late next week.
We do all of the homework for our earnings trades and if you follow the Weekly Wrap you can get these types of trade setups without doing the homework because we do it for you.
We have a few updates on our current trades so we have to roll. The FOMC announcement is due out at 2pm sharp so get your popcorn ready.
As we head to press, the Dow is up 21 points to 15,896 while the S&P 500 is down a point to 1,779. The Nasdaq is lower by 15 points to 4,008. The VIX is down 0.30 to 15.91.
Subscribers, hit the Members Area for the updates and stay locked-and-loaded into the afternoon in case we take action.