Let's Try An Earnings Play
Unofficial Earnings Play Hello Smart Option Sellers! As we wait for earnings season to fully kick into high gear and expose potential put-sell opportunities, I thought I'd offer up an unofficial early earnings play. From time to time, I like to give everyone other ways to potentially make money with options, in addition to our put-selling ways. In this case, it's from buying very speculative, cheap options, right before a company's earnings announcement. We've had some big winners in the past using this method, and of course we've had some losers. As you know, I'm not a fan of buying options at all - except in the case of the strategy that I outline in the Warren Buffett Report (see section below), and on other certain occasions - being the above-mentioned earnings play speculation. In order to have any chance of making money on an earnings play, you have to choose a stock that has had large moves in the past once the announcement is made, as well as finding undervalued options to buy, that represent a fighting chance to explode in price. This is not an easy task. The option market-makers know which stocks have a history of large moves, so they price the options accordingly. But sometimes we are lucky enough to find an exception. Today, we may have just found a trade that's worthwhile. Ford Motor Co. (F) Talk about a stodgy old stock! Ford is definitely not a stock that has large movements whatsoever, either before earnings or after earnings are announced. So why play it? Because the stock had a large fall just last week (for Ford's standards) due to an estimated earnings announcement they made, in which rising metal prices will affect its numbers when they release after the bell today. So they sort of pre-announced last week and the stock fell $1.50 per share. See the chart here. We're going to make a play on an even bigger move come tomorrow morning by buying a straddle on Ford. Ford announces today after the closing bell, which means if we want to take a position, we need to do it before the close of trading today. Since we don't know which way the stock will move, we have to buy both a call option and a put option to cover our bases. Yes, this entails two transactions, and that's where a straddle comes into play. What's a straddle? A straddle is just a fancy word that describes a trade that buys both a call option and a put option for the same strike price and for the same expiration date, all in the same single transaction. If the stock moves big enough tomorrow, one of those options will be profitable and the other one won't. As long as the profitable option outweighs the loss on the other, it doesn't matter. You can walk away with a win. We want to make sure we buy cheap enough options because the failure rate of these kinds of plays are very high, so we don't want to put up too much money. What do I consider cheap? Any option that is $.20 - $.25 per contract or less. This is a very speculative play, so do not go crazy with it. If you feel you want to get in on this very speculative trade, here's what you can choose to do: *This trade is completely unofficial and optional. Look to buy the Ford January 26, 2018 (expires this Friday) $12 straddle (buying both the $12 call options and the $12 put options) for a total net price of no more than $.35 per straddle This means you will pay no more than $.35 for the whole straddle. Or, if you are unsure how to buy the straddle, you can outright purchase the $12 call option and the $12 put option separately from each other, but don't spend more than $.35 total on each added together. In this case, you might end up buying the $12 call for $.14 each and the $12 put for $.16 each. Currently, the straddle is priced at $.30 bid/$.32 offer, so you should be able to get it cheaper than $.35 total. Once again, you can enter each trade individually as two single transactions, or you can buy both at the same time as a single "straddle" spread transaction for the combined total. It's up to you. If you don't know how to buy the straddle spread, you can either ask your broker for help or you can stick to buying each option separately. What's the worst case scenario for this trade? That would be if the stock goes completely nowhere in price tomorrow. What we need to happen to make a profit is for the stock to have a move large enough to cover our cost in the trade. In this case, that would be roughly $.35 per share from where Ford stock closes today. If Ford can move above $12.35 or below $11.65, we can make a profit. Depending on which way the stock moves, one of your purchased options will gain more in value than what you'll lose on the other. If the stock finishes at $12 per share on Friday, you will lose on both options. That's the wort case scenario. Make sure you use the options which expire this Friday January 26, 2018. If you do decide to get involved, be ready to get out of the trade tomorrow or Friday. I will give instructions then. Make sure to check your emails for my alerts. This trade is good for today only. Do not enter these trades tomorrow. Remember the rules: 1. These are "unofficial" trades, so you can't hold me to it! 2. Buying options is a low probability trade, so there will be many more losses than wins. This is why you only want to buy the really cheapie options. 3. These are one-day trades. You will know very quickly whether it will be profitable or not. 4. Don't go hog wild. These are "fun" trades, but don't bet the house. 5. Use the January 26, 2018 expiration contracts that expire this Friday. That's all for now. Let us know if you get involved with this trade. Remember, it's optional and unofficial. Continue to contact me here Regards,
Lee Let's Grab That Cash!