With Wall Street getting ready for the upcoming 1Q earnings season in April, current earnings reports have been an afterthought. Publicly-traded companies have different reporting periods and quarters depending on when their corporations were formed and the offbeat quarters are still worth watching.
Every Sunday night, we list possible earnings trades that we like for the upcoming week. Some trades are bullish, some bearish, while others are possible straddle and strangle option trades.
Our goal is to find stocks that could move 10%, up or down, to make a 100% return with near-term options. One trade we were targeting was an option trade for KB Home (KBH, $19.07, up $1.439).
Here were our thoughts in Sunday’s 3/16/14 Weekly Wrap (quotes from 3/14/14):
“KB Home (KBH, $17.51, down $0.17)
April 18 calls (KBH140419C00018000, 0.70, flat)
April 17 puts (KBH140419P00017000, $0.70, up $0.05)
Thoughts: We have played bullish positions recently in KBH and this will be a big quarter for the company. They could say the weather played a major role in a miss or they could say nothing and business is good.” (END)
The knuckleheads on Wall Street have been downgrading the stock in recent weeks but we have said KB Home was one of our favorite stocks in the Housing sector.
The company reported a profit of $0.12 a share on revenue of $450.7 million versus estimates for $0.08 a share on sales of $435.3 million. KB Home also ended the quarter with a higher number of homes in backlog and with a higher average selling price.
We listed put options in case the suit-and-ties knew something we didn’t due to the downgrades but business was great and they were way off on their numbers.
We should have listened to our gut as the April 18 calls (KBH140419C00018000, $1.40, up $0.70) are up 100% and gave traded to a high of $1.67.
The April 17 puts (KBH140419P00017000, $0.15, down $0.40) are folding like a cheap lawn chair as they are down over 70%.
The beauty of a strangle option trades is that if a stock does move roughly 10% or more, the right near-term call and put options should offset each other enough to make a decent double-digit profit.
Both options could have been purchased on Monday’s open for 70 cents apiece and the premiums would have total $1.40.
With the calls at $1.40 and the puts still at a 15 cents, the premium adds up to $1.64 and would represent an 11% return if both sides of the trades were closed at current levels.
We didn’t take this trade for our Daily but we wanted to show how these types of option strategies work because we do recommend them from time to time in our Weekly Wrap.
Our Daily newsletter aims at making triple-digit profits for all of our trades and the Weekly Wrap strides for monthly double-digit returns.
We have been busy with our current trades and while we may miss a few here and there, we should have stuck to our guns and issued this trade for our Weekly Wrap. We probably should have gone straight-up with the call options for our Daily.
We can’t complain though as we have some nice pin action going with our current trades.
As we make the turn, the Dow is higher by 2 points to 16,338 while the S&P 500 is gaining 1 point to 1,873. The Nasdaq is down 3 points to 4,330 and the Russell 2K is down 2 to 1,203.
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