MercadoLibre Presents Some Earnings Plays

 | Aug 07, 2014 | 2:09 PM EDT
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Originally I was looking at SolarCity (SCTY) for an earnings play, but I'm not too excited with the 4% push higher today and the big push we've seen in solar. I already have exposure to First Solar (FSLR), so I'm going to look to try and hedge that a bit into the SolarCity by bumping up the put side. I still need a bit of a push there to see green, as my earnings trade is still in the red right now. 

Rather than looking at SolarCity, I'm going to look at MercadoLibre (MELI). This is another name offering several potential pre- and post-earnings plays. MercadoLibre has been a pretty good mover around earnings, but it tends to calm down by the close. In fact, it has closed below the implied move on the last four reports after trading above the straddle pricing about half the time. If we expand further to the monthly expiration close, we find two important things: a fade trend and a volatility crush.

Going into earnings, this is a bit tough. A straight-up buy on straddles or strangles is tough, but so is the sell. We've seen strong gaps up (far left column), so any straddle buy is likely a sell soon after the open. I just don't see it, though. And the pushes in February and November keep me away from a straddle sell. Instead, I think calendar or diagonal spreads are the way to go here.

My preferred trade is long September $90 put/$95 call strangles and short August $85 put/$100 call strangles for about $6.90. The biggest risk here is a huge move, which could result in a loss of $1.90. No more could result in a slightly bigger loss, but it will depend on what happens with the implied volatility of the options. I think $2.50 might be the downside here, while the upside is similar, but I see a greater chance of making money.

On the basis of three out of the past four earnings going flat into expiration, simply using the September/August $90 puts/$95 calls calendar spread for around $3.85 is intriguing. This is long the September strangles and short the August. The risk here is simply $3.85, while the upside looks to be at least twice that cost. I see this as slightly riskier but really hard to pass up if someone is looking for a lottery-ticket type of play and has some patience.

A play to consider intraday is the fade. It has made money on three of four times with an average gain of 3.2% shorting the open and buying at the close. Additionally, holding that short until the monthly expiration has shown a gain of 5.9% during a 14-day average hold time. Not bad. Not bad at all. If the stock rallies 3% over the opening price, I will be looking short, as well as looking to sell bearish call spreads on the basis of the closing price, with the short call strike at the closing price with a $4-$5 range to the long call expiring this August.

Lots to choose from here. It has wider spreads, and it's a somewhat volatile name, so I will be working on getting the pre-earnings positions into the last hour of the day.

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