Duking it Out This Earnings Season
Not since Michael Phelps captured his record eighth Olympic gold medal has a nation been so captivated by a single broadcast event. What am I referring to? Friday's fine edition of "Options Action", of course.
Earnings season has been a Godsend for the show, highlighting both our traders' stock picking acumen, as well as their option trading prowess. We've had some pretty remarkable calls, and rather than wait until next Friday to discuss them in out Upside Call/ Called Out segments, I thought I'd post it online so our many fans (which now include Webster, Kit from Knight Rider and rumor has it, Paris Hilton) can follow along.
Our first trade centered around possibly the most important batch of earnings: the energy sector. With tech and financials on fire, the market will need new leadership if the party is to continue. With that in mind, Mike Khouwof Cantor, whose star power exceeds Kit and Webster's combined, suggested buying the Chevron, Jan 10 60/70 risk reversal, selling the Jan '10 60-strike put for $2.40 and using that money to finance the purchase of the Jan '10 75-strike call for $2.10. Chevron reports on Friday, but Mike's trade could offer plenty of opportunity to cash in.
Stacey Gilbert, Susquehanna's Senior Derivatives Trader (and pride and joy of the options world), suggested a much more event-driven trade. As a play on Las Vegas Sands earnings, Stacey recommended what appeared to be a straightforward trade on the company, buying the August 10-strike calls for $1.60. Stacey made the point that the implied move of 8% was considerably less than the four quarter average move of 15%, and that the option had about $0.70 of intrinsic value. Already the trade is working, with that same call going for about $1.90. No wonder "Rain Man" is her favorite movie.
And in our much talked about Put Up or Shut Up segment, Mike and Dan Nathanduked it out over Disney. In a move that was so out of character we considered calling in a shrink for immediate diagnosis, Mike suggested buying the way out-of-the-money August 24-strike put for $0.20 as a quick catalyst for a potential Disney's earnings shortfall. Dan, however, stuck to his playbook, and suggested a similarly bearish bet in buying the August 26/24 put strike for about $0.55 cents. Dan can only win $1.45 on the trade if Disney trades to the 24-strike put, but by selling that lower stirke option, he reduced the cost of his trade.
Stacey ruled for Mike, but the market will have the final word on Thursday when the company releases results.
In our upside call segment, Stacey updated us on her bearish bet on Microsoft. Two weeks back, she suggested buying the August 24-strike put for $0.90 as a way to play disappointing earnings. Bravo! That put is now trading for $1.40. Talking about risking less to make more. Stacey recommended selling that put and locking in gains.
Talk about the upside call.
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