Scoping More Earnings Options Action

 | Jul 24, 2014 | 12:42 PM EDT
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Facebook (FB) didn't get exactly the move I wanted, but it was enough this morning. The excitement over the earnings was enough to keep the $75 calls, with the stock higher this morning, and gave me a chance to exit all the ratio call spread a bit above $1.50. This part of the trade only had a $0.31 entry cost, so it has bought some time with the diagonal spreads that I paid $2.50 for yesterday. The worst case, if the stock stays up, is a value of $0.50, but I will cut these further if this gets to $2.50 or above. 

Rather than running through a bunch of earnings trades, I thought it might be more helpful to actually explain how I use these charts I've been posting around earnings. I know I don't have to say it, but I will say it anyhow: It really doesn't matter what approach you use with earnings, whether it is charts, fundamentals, history, volatility, etc., earnings are basically the biggest unknown on a common wide scale for traders. Yes, there are other events that make fantastic catalysts, but when you talk earnings for a company, pretty much anything can and will happen.

The trades here should be sized appropriately. For some traders, that size is zero. It should be a stay-away. I see this as a supplement to other trading and separate from a long-term investment strategy. So here's a quick look at how I use these charts, in a simply, friendly format.

On Amazon (AMZN), the column all the way on the left (all in red) tells that me the stock has opened below the price of the straddle pre-earnings for the last four reports. That means that if I am buying a straddle or strangle, I can expect I will be flat to down on the open. However, the column next to it shows me that the stock moved beyond the price of the straddle on the last three reports, but not by much. 

AMZN Options Pricing

Conclusion: Straddles are a possible play, but strangles are a no.

The far right column has two reds and two greens, which means it closed lower than it opened twice (two reds) and closed higher from the open twice. Not exciting, but seeing the three closes in a row down around 10% screams butterfly, far-out-of-the-money calendar spreads, far-out-of-the-money diagonal spreads or, for those looking for lottery tickets, front-month spreads where I could be long a strike 7% out of the money and short one 10% out of the money.

Conclusion: I love the butterfly idea where I'm long an at-the-money straddle, short 2x strangles that are 10% out of the money, then long a strangle about 17.5% out of the money. (If you examine the pricing, you'll find it much more attractive to break-even than a straddle, about 4.7% vs. 6.1%).

My trade here would be long July $360 straddles, short 2x July $395 calls/$325 puts and long $420 calls/$300 puts

On Netgear (NTGR), again I see a stock which has opened below the straddle pricing for four straight quarters. Again, I see that the stock trades at least near, if not above, the straddle price intraday, however, not as strongly as Amazon did. Furthermore, the stock has closed lower on three of the last four reports, with the one higher closing only a single percent higher than the open. Lastly, it is clear from the closing values that I should expect a decent-size move with an average in the 7% area.

NTGR Options Pricing

Conclusion: Avoid straddles and strangles. Look to fade the opening post earnings. Selling iron condors and closing immediately in the early morning is certainly a possibility. If I want a lottery ticket, then I would use butterflies or something like a July $34-$31 put spread; however, given the spreads and options available, I am more likely to use a diagonal spread. 

Pandora (P) is certainly seeing a trend of opening below the straddle pricing. Lots of red on the left, which says buying volatility has been a loser's game, and the red on the right tells me that going long after the open is a big risk. Furthermore, I see three red opens and four red closes.

Conclusion: While big moves are possible, ratio spreads, especially on the put side, are a great consideration. Another, more advanced approach is to sell straddles with the idea of closing the short puts at the open and holding the short calls, looking to play the fade. Shorting the stock or selling calls to buy puts at the open is another consideration. I don't like calendar spreads because the ranges have been too wide. I would only consider diagonal spreads, likely to the downside, where the cost of the trade is less than the distance between the long and short strike.

On Starbucks (SBUX), I try not to be biased, but this one is up there with Whole Foods (WFM) as a favorite to play for earnings. This one has not been a big mover for earnings. Very tight ranges between the open and the maximum move for the day. It has closed higher on three of the last four reports, but I would note that it closed higher from the previous day's close all four times.

SBUX Options Pricing

Conclusion: Bullish put spreads jump out at me as a play. I would consider selling straddles or strangles as well, but I would look to oversell the put side. A very tight calendar or diagonal spread is the most attractive, such as the long August $80 call with a short July $82 call. There are obvious ways to spin this, but keeping it basic here, that would be my preferred trade.

On Baidu (BIDU), although there is a lot of red on this chart, there are nothing but plus signs. The last three reports have resulted in very small moves, albeit all up from the prior day's close.

BIDU Options Pricing

Conclusion: Bullish put spreads (selling put spreads) jump out as the top play here. Selling volatility has generally worked, but the better play might be selling straddles right at the open price as a post earnings play. A lottery ticket here would be a very tight call butterfly such as a July 207.5-212.50-217.50 for around $1.00. I would prefer to use an unbalanced call butterfly of long 1x July 205, short 3x July 215, long 2x July 20 for $2.20.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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