There were a couple of earnings trades we were watching this week and while one was on a company we have never traded options on, the other was an old favorite.
Scholastic (SCHL, $30.65, down $0.34) came into the week just above $30 and was reporting earnings after the close on Wednesday. Shares ended the session at $31 ahead of the announcement and we had a feeling there would be a test to $25 after our weekend homework and how the chart was looking.
Needless to say, the company reported a quarterly loss that nearly doubled after weaker-than-expected demand for the publisher’s “Hunger Games” series. Scholastic reported a loss of $20 million, or $0.63 a share, versus a loss of $10 million, or $0.33 cents a share, in the year-ago quarter. The buzz just wasn’t there as book sales dropped 60%.
We looked at the April 25 puts (SCHL130420P00025000, $0.65, up $0.10) on Sunday night and they were at 45 cents. The biggest problems we had with recommending these options as an official trade is they are thinly traded and the bid/ask, or spread, was too wide to get a good fill. Even though the options are up over 20% the bid/ask is 55 cents by 80 cents. Volume for the day is 10 and open interest is at 31.
We like to trade more liquid options with tighter spreads so we passed on this trade. Perhaps, we should have shorted the stock and called it a day.
The other stock we were watching this week was Nike (NKE, $59.73, up $6.13) which has been a favorite earnings trade for us over the years. If you look through our past year option recommendations you will see numerous times where we have made our subscribers triple-digit profits. We normally play call options on Nike but yesterday’s market action and recent worries on how well, or not so well, the company’s quarter was going seemed mixed. We weren’t so sure because we recently purchased the Nike Fuel Band for our office staff and they love it. We aren’t sure of the sales yet because we haven’t listened to the conference call but Nike’s brand name has been showing up everywhere.
The bonus package with Nike is that margins improved for the first time in 8 quarters and they beat the Street’s estimates by 6 pennies. Revenue matched expectations for the most part but there were some suit-and-ties who expected more.
Still, like a deer in headlights, we sat on the sidelines and missed a monster trade.
Shares closed at $53.60 on Thursday and we figured in an 8% move for the stock, or $4-$5. We looked at the April 57.50 calls (NKE130420C00057500, $3.00, up $2.60) that closed at 40 cents yesterday and are up over 625% today – and the April 50 puts (NKE130420P00050000, $0.05, down $0.55) which closed at 60 cents and are down 95%. Together, these options would have created a sweet strangle option trade and the premiums together for both the calls and puts would have been $1. A 10-contract trade on both options would have cost $1,000.
Although the puts will likely expire worthless, the calls would have easily offset the losses to where this trade would have returned 200% if the calls are closed at current levels. These strangle option trades are also known as “chicken trades” and we should have taken it because we were a little nervous on which way the stock was headed.
Keep these types of trades in mind if you feel a super-sized move in a stock is coming but you aren’t sure of direction. These types of option strategies sound complicated but they are easy to do in your trading account and they can provide some juicy returns.
Nike also trades WEEKLY options and as a lottery play we also looked at the March 57.50 calls (NKE130322C00057500, $2.50, up $2.38) that closed at 12 cents yesterday and are up a whopping 1,983%. A 20-contract trade would have cost $250 and would be worth a cool $5,000 at current levels. Should’ve, would’ve, could’ve – right? Here is the option quote from Yahoo Finance:
The flip side of the Weekly options is shares could have stayed below $57.50 and the March options expire today which means these calls could have expired worthless. However, the risk/ reward on these types of earnings trades are compelling and we will do a better job of profiling them on our Watch List.
April earnings season is just 3 weeks away so get ready for some hot recommendations as the market could get really interesting from here on out. We have some last minute updates for our current trades before the weekend hits so let’s go check the tape.
Before we roll, here is how the indexes look – the Dow is up 73 points to 14,494 while the S&P 500 is higher by 8 points to 1,554. The Nasdaq is bouncing 15 points to 3,237.
Subscribers, check the Members Area for the updates and if we take any late day action we will send out a Trade or Profit Alert. We will be back Sunday with the Weekly Wrap and on Monday morning with our Daily report. Until then, have a great weekend everyone!