Unofficial Earnings Play
Unofficial Earnings Play Hello Smart Option Sellers! The market is still in a manic state and jumping all over the place. We've seen the drop from late last week continue on so far this week, with the Dow coming off close to 500 points yesterday alone. The next downside test is once again the 200-day moving averages for all the indices. If it holds, we'll bounce. If it breaches, we could see some real solid selling take place. Here's the current chart of the Dow Industrials with the 200-day moving average sitting at $23,673 (red line on chart at time of printing). As we know, put-selling is a neutral-to-bullish type of trade, and we only want to take a stab when the market tells us to. At this time, and as I've mentioned before, it doesn't make sense to get in front of the freight train if we're just going to get steamrolled. I've got a few plays on my radar and when the markets give a better signal, we will hop in. We're also right in the midst of earnings season, and jumping into a new put-sell trade right before earnings time can be hit or miss. If we enter before earnings, we can catch a good wave if the stock rallies. But if the stock tanks, we'll be kicking ourselves for not being cautious. Two of my potential trades have earnings coming out next week, so I'm deciding if the time is right to enter. Also, volatility is heightened before earnings, which means the options are usually more expensive. That would be a great time to strike. I will send out an alert if I feel new trades are warranted. And speaking of earnings.... Bristol Myers Squibb (BMY) BMY is releasing earnings before the bell tomorrow and I have an unofficial trade that might interest you. 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. 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 "strangle" comes into play. What's a strangle? A strangle is just a fancy word that describes an option spread trade that buys both a call option and a put option on the same stock, at different strike prices, and for the same expiration date. Both trades are executed all in one 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 type of play is very speculative play, so trade if if you see fit. If you you want to get in, here's what you can choose to do: *This trade is completely unofficial and optional. Look to buy (buy-to-open) the BMY April 27, 2018 (expires this Friday) $48.50 put options AND buy the April 27, 2018 $53 call options, all in the same single transaction for a net total price of $.50 debit or under. Depending on when you place this order, the prices may or may not be different from what I've outlined above. For instance, you may be able to buy the $48.50 puts for $.20 per contract and buy the $53 calls for $.25 per contract, giving you a total debit of $.45 for the whole strangle. For those of you who are not comfortable buying the strangle (or don't know how), you are more than welcome to make two separate single transactions and buy each separately from each other. As long as you stay at or under the $.50 total debit price, you are good to go. Right now, here are the current bid/ask prices on each: $48.50 puts = $.20 bid/$.23 ask $53 calls = $.15 bid/$.19 ask BMY stock is at $50.70 at the moment, so we would need the stock to move either below $48 or above $53.50 to make a profit on this trade. That's roughly $3 in either direction BMY would have to move. And based on some of its recent past history, it has moved over $5 per share on numerous occasions. Considering the big $9 drop BMY had last week alone, I think we may be able to see it move another $3 per share, especially if there are some surprises in the numbers tomorrow. Once again, you can enter each trade individually as two single transactions, or you can buy both at the same time as a single "strangle" spread transaction for the combined total. It's up to you. If you don't know how to buy the strangle 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. If that happens, both options will lose value and a loss is sure to occur. 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. This may happen tomorrow, or it can continue on through Friday. 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. Make sure you use the options which expire this Friday April 27, 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 April 27, 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. That's all for today. Contact me here Regards,
Lee Let's Grab That Cash!