Sketchers USA (SKX, $21.81, up $2.24) shares are approaching their 52-week high of $22.37 as they have traded up to $22.15 today. We have played this name in the past and shares always seem to make a huge move after they report earnings so keep this in mind down the road.
We recently revised and sent out our trading manual, How to Trade Options on Momentum Stocks, so for all of those who ordered the 1-year deal back in December, you should have your copy as they shipped last week. If you haven’t, email our support team.
We wanted to cover Sketchers because we profiled a strangle option trade on our Watch List this week that did really well today. These options trading strategies can be hard to understand but we have simplified it in our option manual and will try to do so here in this space.
With February options expiring todmorrow, we could have used “cheap” options to play this move in Sketchers. Now, trades like this will need a move of 10% or more or otherwise the options premiums will get deflated as both options could expire worthless if shares would have stayed flat or moved less than 5%.
Sketchers went into yesterday’s close at $19.57 so a 10% move would mean they needed to trade up to $21.50 or fall below $17.50 for this trade to have a good chance of hitting a triple-digit return. Here is how it would have played out.
The February 20 calls (SKX130216C00020000, $2.00, up $1.50) were going for 50 cents into Wednesday’s close and are up nearly 300% on the news.
The February 19 puts (SKX130216P00019000, $0.05, down $0.35) were at 40 cents going into yesterday’s close and will likely expire worthless tomorrow.
A 10 contract trade in each option would have been $900. Ten contracts of the call options would have cost $500 and they could be closed at $2.00. This would net $2,000 into your account. The puts cost $400 for 10 contracts and they will likely expire worthless tomorrow.
The $900 you invested is now worth $2,000 and you would be out of the trade after the puts expire. The return is a little more than 100%.
These type of trades are also know as “chicken trades” because you are unsure which direction shares will move after the earnings announcement. We may use these types of strangle option trades in the future as they can pay 100% or more in a matter of a day or two as you can see but you have to be careful.
As far as the market today, the bears are growling but support is holding as better-than-expected economic news has shielded Wall Street from the worse-than-expected GDP numbers from around the world.
The Dow is down 10 points to 13,973 while the S&P 500 is up a point to 1,521. The Nasdaq is higher by 3 points to 3,200. Subscribers, check the Members Area for the latest updates and we will be back in the morning with a full report.