There were a number of earnings option trades we profiled in our Weekly Wrap Earnings section and Daily Watch List for this week. With earnings season just getting into second gear, there will be a bevy of opportunities for quick trades that could return 100% or more on stocks that move 5%-10%.
The two trades we profiled for today were Pep Boys (PBY, $10.13, down $1.84) and Coca-Cola (KO, $40.19, up $1.46). Both companies reported their numbers before this morning’s open and while we were unsure on Coca-Cola, we had a very good feeling Pep Boys would disappoint Wall Street.
The company reported a loss of 6 cents a share on revenue of $496 millio. The suit-and-ties were looking for a profit of a nickel a share on sales of $534 million.
Here were our thoughts on Manny Moe & Jack:
“Pep Boys-Manny Moe & Jack (PBY, $11.89, down $0.20)
May 10 puts (PBY140517P00010000, $0.30, flat)
Thoughts: Shares could be headed to single-digits on another earnings miss. The company has missed Wall Street’s estimates over the past 4 quarters by 1,2,1 and 9 cents last quarter. This is a sign of bad management and with the rough winter they will likely kitchen sink their numbers. Shares usually trade lower after the announcement and we like these put options.
The trade can be entered before Monday’s close
and if shares sink below $10 on Tuesday these puts should easily double.” (END)
We had a feeling shares might hit single-digits on another earnings miss but these options are thinly traded. The open interest coming into today was only 10 contracts on the May 10 puts (PBY140517P00010000, $0.40, up $0.10). They have traded over 300 contracts today but the bid/ ask was out of whack at 10 cents/ 30 cents when we looked at the trade ahead of yesterday’s close.
As option traders, we like to see the bid/ask at 5 cents or less with heavy open interest. This makes it easier to get in and out of option trades without getting scalped.
As far as Coca-Cola, the company matched estimates for a profit of $0.44 a share with revenue coming in slightly higher. Here were our thoughts on Big Red:
“Coca-Cola (KO, $38.63, down $0.26)
May 39 calls (KO140517C00039000, $0.50, down $0.18)
May 38 puts (KO140517P00038000, $0.40, up $0.08)
Thoughts: This is an important quarter for Coca-Cola and the options are relatively cheap. We have listed a strangle option trade and while it would be hard to short the stock, shares could test $36 if they miss estimates.” (END)
The May 39 calls (KO140517C00039000, $1.30, up $0.80) were going for 50 cents ahead of. Monday’s close and are up over 150%.
The May 38 puts (KO140517P00038000, $0.10, down $0.30) are down 75%.
This would have been a nice double-digit winner as the calls and puts could have been purchased for 90 cents and at current levels the options together are going for $1.40. This represents a return of 50+% and here is how the trade could be managed going forward.
The May 39 calls could be closed at current levels that would lock-in gains of nearly 50% even if the May 38 expire worthless. They are only worth a dime so they could be left open for protection going into May.
If Coca-Cola slips back below $40 and then $38 by mid-May these options could rebound. If shares are at $38.80 the puts would be worth 20 cents. If shares are at $37 the options would be worth $1.
This would make the overall return on the original trade greater if shares do fall below $38. It would be a no-brainer to leave the put options open while closing the calls. If shares stay above $38 the options will expire worthless but the trade has already locked-in double-digit gains.
The beauty of strangle option trades is that this trade could return triple-digits without the risks of going short at current levels.
There are a number of other earnings trades we like for the week so stay locked-and-loaded.
As far as the market, the indexes got off to a good start but have weakened as we head into the second half of trading.
The Dow is down 26 points to 16,146 while the S&P 500 is lower by 2 points to 1,828. The Nasdaq is off 39 points to 3,983 and the Russell 2000 is declining 10 points to 1,105.
It appears geopolitical tensions are heating up and is the cause for the pullback. Once again, today’s close will be important.
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