Post-Earnings Option Plays

Playing the Expiry: July 29, 2011

We're halfway through the earnings seasons here in North America and many US stocks are beating estimates through the roof. As mentioned earlier, the big boys like Apple [AAPL:NDQ], Google [GOOG:NDQ], and IBM [IBM:NYSE] all reported stellar earnings, pushing stocks to new heights. This week, China's Baidu [BIDU:NDQ], Las Vegas Sands [LVS:NYSE] and Amazon.com [AMZN:NDQ] posted earnings that also pushed their stock up.

Implementing an options strategy before earnings is always a good way to make money, but if you've missed the opportunities by waiting on the sidelines, then a post-earnings spread or combination could still hold profitable.

Baidu, whose earnings were on Monday, saw its stock soar nearly $10 the following day to $165. Now that investors have given a new valuation on the company, we are seeing some stability and support above $160 and resistance at $165. A short combination (or strangle) could prove to be successful if the stock's lack of volatility remains for the remainder of the week.

The options still have some significant time value on them. The 160.00 put and the 165.00 call for July 29 expiration are both priced just above $1.00. Depending on the fill, this would provide roughly 2.8 per cent downside and 2.8 per cent upside protection with the stock trading at around $162.50.

Amazon.com is trading higher by $11 this morning on good earnings and a better-than-expected forecast. The shares are at an all-time high, at around $225 today. A short straddle at 225.00 for July 29 expiration looks extremely tempting. The premiums on the 225 calls and puts are about $2.80 and $2.60, providing a net return of $5.40 or 2.4 per cent protection from the strike price.

The only warning to this trade would be that the shares are now above the Bollinger Bands. Some may view this as a bullish moves as traders are willing to push it up higher than the normal trading range, others may see this as an opportunity to short the shares, hoping it will fall back into the regular trading range.

Lastly, Las Vegas Sands, whose shares are up $1.56 this morning to $47.86 courtesy of good earnings, could also provide for a good trade. The shares, which are also above the Bands, still has massive premiums for out-of-the-money calls and puts. Both the 49.00 call and 47.00 put have more than 30 cents of value. This would net over 60 cents. If you're more neutral and think the shares will remain very close to $48 for the remainder of this week, you could write a straddle and collect 60 cents and 74 cents on the call and put respectively.

The shares however, have seen resistance at $48 and is having difficulty pushing upwards. This also occurred three months ago just before earnings. With this in mind, one may consider keeping more downside protection and being more aggressive with the call.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. Reminder that all Playing the Expiry posts are transactions placed in my account and should not be taken as professional advice. I currently have weekly call options (long and short) on Baidu.com and uncovered weekly calls and puts for Las Vegas Sands at 49 and 48 respectively.