MomentumOptionsTrading.com Midday Update for 5/13/14
Rackspace Hosting (RAX) Surges After Earnings Beat Profit Alert (AXP, RFMD)!!!
Shares of Rackspace Hosting (RAX, $29.82, up $2.29) are rebounding strongly following a recent test to 52-week lows.
The company reported a profit of $0.18 a share on revenue of $421 million versus estimates for $0.12 a share on sales of $419 million. Rackspace also said it sees current quarter revenue coming in at $434-$440 million compared to a forecast for $435 million.
The beat and raise has sent the short sellers running for cover as shares have traded to a high of $31.60.
I mentioned on Monday I was looking for a way to play Rackspace as I had a good feeling shares would move 10% or more following their earnings announcement. Although I was bullish on the stock, most analysts were penciling-in an earnings miss for the company. With the stock near 52-week lows, I wanted to buy some insurance in case I was wrong. However, the problem was that the premiums were expensive and I didn’t want to overpay for insurance.
Shares were above $27 going into yesterday’s close and the May 24.50 puts (RAX140517P00024500, $0.05, down $0.47) were trading for just over 50 cents. These options may or may not have covered a 10% drop in the stock as they expire this Friday so I didn’t want to use them. I knew a move of less than a 10% selloff in the stock would likely result in these options expiring worthless.
The June 22.50 puts (RAX140621P00022500, $0.11, down $0.38) were trading for 50 cents but this would have required a 20% drop in the stock just to get them “in-the-money”.
I wanted the protection but I just didn’t feel comfortable with the premiums and the move shares would have to fall to offset the call options which were also expensive.
The June 30 calls (RAX140621C0003000, $1.40, up $0.30) were trading for $1.10 going into Monday’s close and have traded to a high of $2.17 today.
I could have used either the May or June aforementioned put options to create a strangle option trade with these call options that would have cost roughly $1.70 going into Monday’s close.
The strangle could have made a little money as the calls opened at $2.17 but the trade would have needed to be closed at the open. Otherwise, the trade would be down at current levels as the put options have been hammered.
Of course, the lottery trade would have been the May 28 calls (RAX140517C00028000, $2.05, up $0.65) straight up as they have traded to a high of $3.35. These calls were extremely pricey going into yesterday’s close as they were 50 cents “out-of-the-money” and expire this Friday.
As you can see, the opportunity was there to trade Rackspace but the setup wasn’t.
With 1Q earnings season winding down, earnings trades will be harder to come by until July. This is when 2Q earnings season begins. In the meantime, I will continue to monitor the companies reporting through mid-June while making sure we don’t overpay for a possible option trade.
As far as the market, the bulls are struggling to hold their gains following the pop at the open. The Dow is up 25 points to 16,720 while the S&P 500 is gaining 2 points to 1,898 after reaching 1,902. The Nasdaq is lower by 9 points to 4,134 but more important is the action in the Russell 2000 as the small-caps are down 8 points to 1,125.
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