Well Fellow Stock & Option Traders, it’s always a little deflating to arrive at the fireworks display and find that someone forgot how to light the fuse. But that is exactly what seemed to happen today with Goldman, which Sage noted was not meeting expectations within 10 minutes of the market open:
“I am not seeing the movement in GS that I was expecting at the open so no plays yet”
And so it continued throughout the day with Goldman staying in a relatively tight range that matched the movement in fact in the NASDAQ (non-descript at best!). However, some stocks were on the move throughout the day, including Boeing. Boeing held a conference call that sparked a decline below the $100 mark. The company announced that it would delay delivery of its 787 Dreamliner commercial aircraft by 6 months. When you find a rock solid company that announces disappointing news in the short-term, look for opportunities! The November short puts at strike 90 had about $1.20 of premium throughout the day and although this is a naked put, a safer bull put spread 90/85 could have been entered with much lower risk and still some attractive premium.
This trade is safe as long as the stock remains above $90 by November expiration. So the stock would have to fall another $8 or so for the trade to run into trouble. Safe traders might sit back to see if the stock continues to slide and enter the trade at a later stage while more aggressive traders might decide it’s worth scaling into a position early (that’s what Sage did today!). Meanwhile Costco was a runaway success following its earnings report. Costco moved up almost 10% as the company earned $372.4 million during the last quarter , a year-year increase of 4.7%. Expect to see this type of volatility frequently over the coming weeks as earnings season has just kicked off.
So how do you take advantage of this movement?
One approach is to enter a bullish credit spread following the announcement. For example, an October bull put spread 67.50/62.50 intra-day offered over $0.70 of premium. This means that if the stock were to remain above $67.50 through to October expiration, the bull put would expire worthless and the entire $0.70 premium would be captured as profit. Since commissions are only spent entering a credit spread, only 2 commissions would be necessary – as opposed to 4 if transactions were executed to close the positions.
Another potential approach is to view the earnings report as a catalyst to a change in fundamental expectations. You could take the view that long-term the stock price is more likely to continue higher and yet take advantage of the still inflated premium in October options. For example, you could consider a longer-term long call option (LEAPS for example) at strike 70 while simultaneously selling a shorter-term short call option at strike 70 for October.
The ideal situation would be for the shorter term short call to expire while benefiting from some stock appreciation through gains in the long call option also (stock must stay below $70 in this scenario). If the stock were to continue higher, the short option could be rolled to a higher strike price further out in time. And, if the stock were to fall, the short call could be allowed expire worthless and then a new short call could be entered at a lower strike next month. In this manner, the short options continually reduce the cost basis of the long option, offer some attractive returns on risk and a great deal of flexibility provided the trader is patient and sticks with the system.
Have a fantastic evening!
