We mentioned there were nearly 50 charts we looked at and dissected for possible earnings trades this week and we were able to navigate the list down to 25 by Monday’s open. We did extended chart work on nearly a dozen stocks and one of the ones we liked best was Garmin (GRMN, $51.69, up $4.52).
We have followed the company for years and have been bearish in the past but the company’s prior quarter indicated business was turning around. The symmetrical triangle shown above was indicating a huge move in the stock based on earnings for the recently ended quarter and Garmin needed a good follow through.
Needless to say, with shares up 10% and pushing fresh 52-week peaks, Garmin nailed it. The suit-and-ties were expecting a profit of $0.62 a share on revenues of $713 million. They were blown away when Garmin announced numbers of $0.76 a share on sales of nearly $760 million.
Despite our past bearishness, we knew the company had a good chance of beating estimates as most of Garmin’s sales are now coming from wearables. However, it is hard to trust a company during a turnaround so we didn’t want to commit money on a long only trade.
With the February options expiring this Friday, it was also a little risky to use these near-term options as a move of less than 5% would have crushed the premiums.
Shares were just north of $47 going into Tuesday’s close and we knew a 10% swing would push shares near $52 or they would tumble to $42 following the earnings announcement.
Knowing this information is crucial going into an earnings trade because it helps you define the trade. Knowing WHERE a stock COULD be headed and the time frame are the two most important factors in setting up an option trade.
We were “chicken” to do a directional play on the stock by buying a call or put option but by buying one of each, we could have doubled our money in less than 24 hours.
The Garmin February 50 calls (GRMN140222C00050000, $1.84, up $1.37) were going for 47 cents into yesterday’s close and have zoomed 291% at current levels. They have traded to a high of $2.88 after opening at $2.61 as shares have traded to a high of $52.72. This would have been a gain of 450%-500% if the options were closed into this morning’s open.
The Garmin February 43 puts (GRMN140222P00043000, $0.02, down $0.25) were priced at 27 cents ahead of Tuesday’s close and have been punished as they are down 93%.
The cost of the trade would have been $0.75, or $750, for every call AND put option purchased. A 10-contract trade using the aforementioned options would have cost $750 and is valued at $1.86, or $1.860, at current levels despite the put options tanking. This is a 143% return at current levels but the trade could have been maxed out for a return of over 450% at the open.
Of course, if shares moved less than 5%, both of these options would have seen their premiums deflate and the trade could have been a big loser.
For those of you that have received our options trading course, How to Trade Options on Momentum Stocks, we talk about strangle options trades starting on page 24 of the manual.
For possible trades on companies reporting after the close today include: Avis Budget Group (CAR), Crocs (CROX), Denny’s (DENN), HomeAway (AWAY), Jack in the Box (JACK), LifeLock (LOCK), Millennial Media (MM), Rubicon Technology (RBCN), Safeway (SWY), Tesla Motors (TSLA), and Veeco Instruments (VECO).
Out of the bunch, we believe Safeway and Tesla will make moves in excess of 10% based on their earnings numbers.
You can also look at these stocks ahead of today’s close as they will be reporting earnings before Thursday’ open: Alkermes (ALKS), Cyberonics (CYBX), Exact Sciences (EXAS), Sonus Networks (SONS), Toro (TTC), and Walter Industries (WLT).
The Fed minutes are due out shortly and after a green open the market is seeing red ahead of the event. As much as Janet Yellen talked last week there should be no surprises. Perhaps the market is a little nervous ahead of the news and could return to pushing resistance afterwards if all is good. If not, the bears might take a stab at support.
The Dow is currently down 9 points to 16,120 while the S&P 500 is off by 2 points to 1,838. The Nasdaq is lower by 15 points to 4,257 and the Russell 2000 is declining 5 points to 1,156.
Subscribers, hit the Members Area for the latest updates as we have placed stop targets on some of our positions that are showing profits.