I wanted to quickly touch on a handful of trade ideas that I have detailed over the last couple months that expire or have legs expiring on today’s options expiration:
Yesterday I posted a video from earlier in the week and detailed a bullish leaning trade idea in Deere (DE) into this morning’s earnings report:
The next idea we discussed was in Deere (DE) a company that might also see some short-term weakness from the coronavirus but might also be the sort of company whose business can bounce back sort of quickly if the virus’s adverse effects were to slow materially in the next few weeks.
DE is scheduled to report its FQ1 results Friday before the open. The options market is implying about a 5% one-day move in either direction which is a tad rich to its 4.5% average one-day post-earnings move over the last four quarters.
Shares of DE are down 4% on the year, already showing some investor trepidation about the fear of slower global growth weighing on their sales. The stock has held the uptrend that has been in place since last spring but has some overhead technical resistance between $170 and $180:
If earnings and guidance are not as bad as feared, and the stock’s recent weakness discounts any more bad news, then the stock could set up for a decent retest of the prior highs near $180 if the coronavirus fears were to abate during the coming months. One way to help finance the purchase of longer-dated out of the money calls could be through a call calendar, selling an out of the money short-dated call and using the proceeds to help finance the purchase of a longer-dated call of the same strike, for instance:
BULLISH TRADE IDEA: DE ($166.50) BUY FEB 21ST WEEKLY – JUNE 170 CALL CALENDAR FOR $6.50
-Sell to open 1 Feb 21st weekly 170 call at $2
-Buy to open 1 June 170 put for $8.50
Break-even on March expiration:
Max risk $6.50, below 170, Friday, Feb 21 weekly short call expires worthless. left long June 170 call for $6.50. The ideal scenario is that the stock is just below $170 on Friday’s close and the short Feb call expires worthless or can be covered for a small amount, leaving long the June 170 call.
A classic example of outsmarting myself got the direction and the thesis generally right, but the magnitude of the move and timing wrong, and most importantly the trade structure wrong.
With the stock up 8% trading at $179, well above the short 170 call strike that expires today, its important to consider managing this trade.
The Feb 170 call is trading like stock with less than two hours to expiration with very little extrinsic premium, at $9.30. But the longer data June 170 call is trading at $15.80, so the spread is $6.50, or exactly what you could have put this one for earlier in the week. At this point it makes sense to close the position, the thesis was wrong and for purposes of explaining, the short Feb call would be assigned 100 shares vs 1 contract short which would pair off against the long June 170 call which has about 67 deltas. Long call, the short stock is now basically a vol trade, that would need to be delta hedged on any large movements… this is now what we were there for… and to get out without a loss for getting so much wrong, as my dad has said to me for years when avoiding worst-case scenarios…. “it sure beats a sharp stick in the eye”.
Action: Sell to close DE ($179) Feb / June 170 call calendar at $6.50 for no gain or loss.
On February 12th, prior to Cisco’s earnings report, I detailed a bearish put spread in Feb expiration:
Cisco will report its fiscal Q2 earnings today after the close.
– Implied move in the options market about 5% or $2.40
– Avg move post-earnings last 4 quarters 6%, the last two though the stock has declined about 8% the day following results.
41% of sales come from outside North America… coronavirus, trade tariffs, and US Dollar strength (DXY) may weigh on earnings and outlook.
CSCO is a cheap stock trading 15x, but earnings expected to grow low single digits this year, with a low single-digit sales decrease. great balance sheet, management, and dividend yield, near 3%… but lots of headwinds…
-A miss and guide down and this stock is testing recent lows in mid $40s… $50 to $52 appears to healthy technical resistance.
Bearish Trade Idea: CSCO ($49.50) Buy Feb 49.50 – 46.50 put spread for $1
-Buy to open 1 Feb 49.50 put for 1.35
-Sell to open 1 Feb 46.50 put at 35 cents
With the stock trading at $46.20 below the short put strike, with less than two hours to expiration, it makes sense to close this position as it is worth its max value of $3.
Action: CSCO ($46.20) Sell to close Feb 49.50 – 46.50 put spread at $3 for a $2 gain.
On January 29th, prior to Facebook’s Q4 earnings, I detailed an overwrite, selling 1 out of the money call vs 100 shares of long stock as a potential means to play for yield enhancement, taking advantage of elevated implied volatility and the potential for the stock to remain rangebound near-term:
Long holders of the stock might consider OVERWRITING THEIR stock, targeting the implied move… this strategy means Selling 1 out of the money call vs 100 shares of stock, to take advantage of elevated options premiums, especially if you think the stock could be the rangebound near term.
TRADE Idea: FB VS 100 SHARES LONG AT 214
SELL TO OPEN 1 FEB 225 CALL AT $3.50. (1.5% OF STOCK PRICE OVER NEXT 3 WEEKS) CALL AWAY UP NEARLY 7%
Break-even on Feb expiration:
Profits of the stock up to 228.50, in line with the implied move, stock called away at 225, but really 228.50 up 3.50, if you add in the premium, received, up 7% in less than a month.
Call sale creates a small buffer to the downside…
Now with FB trading $210 with less than 2 hours to Feb expiration, the Feb 225 call that could have been sold at $3.50 on Jan 29th is now worthless, there is nothing to do but to let it expire. The $3.50 in premium served as a buffer to the downside and has nearly off-set all of the stock’s losses since Jan 29th.
On Jan 21st I detailed a bullish trade idea in INTC prior to their Q4 results:
my thought is that if the company were to post a beat and raise, given its cheap valuation, and the potential for restructuring, the stock would soon be on its way towards $70.
If you agree with that, then buying at the money calls look attractive, for instance:
BULLISH TRADE IDEA: INTC ($60.60) BUY FEB 60 CALL FOR $2.10
Break-even on Feb expiration:
Profits above $62.10, up 2.5%, risking 3.5%, less than the one day implied move but offers more than three weeks to play out.
Loses of up to 2.10 between 60 and 62.10, with max loss of 2.10 below 60
The stock traded as high as $69.20 after earnings and the calls detailed above that could have been bought for $2.10 were worth more than $9 briefly. But the stock has come in a bunch and with the stock at $64.31 they are now worth $4.20,
Action: Sell to close INTC ($64.30) Feb 60 call at $4.20 for a $2.10 gain.
And on Jan 7th I detailed a hedging strategy called a collar, for long holders of Apple (AAPL) into their fiscal Q2 results:
While I get why long term investors don’t ever want to sell stocks like AAPL, it might make sense in front of potentially volatile events like upcoming earnings to consider hedges, possibly collars. Here was the example we used the other day when AAPL was trading $300, it is now higher and would adjust strikes higher if this is the sort of strategy that interests you against you long stock:
Collar against long stock implies selling an out of the money call and using the proceeds to buy and out of the money put… this options overlay allows for gains in the stock to the short call strike but capped there, and losses down to the long put strike, but protected below
For instance vs 100 shares long of AAPl at $300 an investor could Buy Feb 325 – 275 collar for even money
-Sell to open 1 Feb 325 call at $3.40
-Buy to open 1 Feb 275 put for $3.40
Break-even on Feb expiration:
Profits up to 325, capped above, the shareholder could always cover the short call to keep long position intact.
Losses down to 275, protected below
Rationale: an investor would only do this if they were more concerned of suffering losses down 8% vs capping their gains up 8% between now and Feb expiration, which will catch Fiscal Q1 earnings.
Today with less than two hours to expiration, with the stock at $311, the short Feb 325 calls will expire worthless as will the long Feb 275 puts. This strategy cost nothing from the get-go, but as the stock raced higher post-earnings it did show market to market losses as the long put lose value and the short put gained value. But like everything in life there are trade-offs, as stared in the original post, one would only collar their stock if A, they did not want to sell it into the potentially volatile event, and B, they were willing to give up some near-term potential upside for near-term defined risk to the downside, WIth this one, the stock is up $11 from Jan 7th, the hedge will expire worthless, which is a lot better than “a sharp stick in the eye!”