Expect Choppy Action Amid Earnings Reports

Lots of red today, but not a lot of chatter. Watching Twitter and asking around, I'm really only seeing traders take shots to the long side and very little in the way of selling or aggressive shorting. It's hard to get too pessimistic too quick, especially after the run we've had, but given how this market continually turns on a dime, we should still keep a close eye on the action. The difference this time, though, is earnings. Plenty of big names are reporting this week, so if we do head lower, I would imagine the action will be a bit more choppy than the straight-line moves we've seen over recent months. At this point, it seems everyone expects a sell-the-news reaction for International Business Machines (IBM). If so, then I believe that one is a buying opportunity. I'm seeing $205 as a possible destination by the end of the year on this one for the upside. As for earnings, I believe $195 would be the bullish reaction, while support levels are around $182, $178 and $173.39. I am actually leaning bullish here, as I believe too many folks are expecting a selloff. My inclination would be to use a diagonal call spread, long the November 185 calls short the October 195 calls for $6.00. A slightly more aggressive play would be a skip-strike butterfly using the October 185-195-200 strikes for a bit over $3.00. If I am playing sell-the-news, then the October 185-180 put spread for $1.70 seems like the answer. I wouldn't camp too long on that ground, though, unless IBM really disappoints this quarter or with guidance. This is likely to be a more active week, and I'm looking at five other plays, three long and two short. First on the short side would be October 22 puts and November 21 puts both at $0.75 on Lincare Holdings (LNCR). I expect the stock to test its double bottom just below $20. If this fails, then the puts will play out very well. If it holds, then I will exit the puts on a successful test. If the stock surprises, then a quick more to $22.50 is possible. Over that, the puts should be closed quickly. The other short play will be set up very conservatively on Stanley Black & Decker (SWK). I don't expect a big move here, but I am looking for a move toward the $54 level, so I am simply using an October 57.5-55 put spread around $1.40. The October 57.5-52.5 costs about 50% more at $2.10 and gives you more upside, but I'd rather just buy three of the tighter put spreads for the money as opposed to two of the wider spreads. I don't like the odds of SWK getting all the way to $52.50. On the long side, my three names are VMWare (VMW), Polaris Industries (PII) and Check Point Software (CHKP). I am looking for a move toward $61 on CHKP, so I am simply buying October 57.50 calls into earnings. The 60s are cheaper, but I would prefer to take half as many of the lower-strike CHKP into earnings in case the reaction is muted or even negative. There is a lot of open interest in the December put contracts on PII, but that may be for the end of the year or as a hedge. It doesn't appear to be bearish sentiment into earnings. This could be one of the bigger moves, so I would understand a trader using a straddle or strangle here, but I am going with an October 57.50-62.50 call spread. The lottery bearish play here is the October 55-52.50 put spreads, which I may use as a slight hedge. Lastly, I am going with a skip-strike butterfly on VWM with an October 90-97.50-100 combination for under $2.50. VWM looks poised to push $95 on a solid earnings report. The initial reaction here can often be wrong and volatile after hours, so it is tough to react immediately here. If I were looking at the downside, then my target would be $84. I would consider a long put spread using the 90 or 87.50 strike on the long side and shorting the 85 strike, both in October.

Expect Choppy Action Amid Earnings Reports

Plenty of big names are reporting this week, and here are some plays I'm looking at.

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