Options trading, especially around earnings, has gotten quite popular. After all, you can benefit from the leverage of options when stock prices moves are often most exaggerated. That's all good when you guess right on the earnings themselves. But there is also serious risk. The company could miss earnings if you're bullish or could beat earnings if you're bearish, sending the stock – and your options – in the wrong direction.
That's why advisors suggest you steer clear.
But Tom's not waiting for the earnings report. His research has uncovered trends that happen before the report is ever released.
Today, we're going to show you an options play on one stock that will be getting a lot of hype before it reports earnings next week.
And it offers you the potential to double your money in just a week…
The Hype on This Stock Will Put Big Dollars in Your Account
One stock Tom's research marked as a hype machine is performance apparel–maker Under Armour Inc. (NYSE: UAA). You probably already own at least one of their products, and you've most likely seen professional athletes wearing them on TV.
The company is scheduled to report its quarterly earnings before market open on Tuesday, Feb. 12. In its prior report last October, the stock jumped 8% when the company announced better-than-expected revenue numbers.
And for the three quarterly earnings cycles before that, it also beat Wall Street revenue estimates. No doubt, investors expect it to happen again for the fifth time in a row. The stock price is up more than 24% since late December.
Tom expects traders to pile into the stock ahead of earnings, pushing the price even higher.
The way to take advantage of all these good expectations with lower risk is with the purchase of call options. Other traders think the good times will continue so they buy before earnings, instead of waiting for the actual release. That means the underlying stock tends to rally ahead of earnings and may get exhausted by the time the report is out.
You know the old saw, buy the rumor, sell the news. Let's buy that rumor and get out before everyone else has to fight to sell at favorable prices.
Which call option is best to buy depends on your risk tolerance and ability to sell quickly when the time comes.
You want to get a good bang for your buck on your options as the underlying stock moves. In options terminology, you want an option with a strong and positive delta value. Delta tells you how much the options price will move for every one-point move in the stock.
The best choice is an options contract that is at or just slightly in the money, i.e., it has a strike price at or below the current price of the stock. With Under Armour trading at $20.90 Tuesday, that means a strike price of $21 would be favorable.
Next, you don't want to have to worry about time decay. As options get closer to their expiration dates, their prices tend to decay faster. This is called theta value. Rather than study this value, you can simply buy options that do not expire within the next month. That should mitigate any speedy price decay over the next week.
Look for a call option on UAA with a strike price of $21 and an expiration of March 22. These options trade for around $1.24. And if UAA shares jump to $22.4 by Feb. 11, you could double your money without ever seeing the earnings report. That means UAA would need to jump about 9.5%, which is right in line with its 8% jump after its last earnings report.
Remember, this was just an example. If the market rallies, you may need to move to the next higher strike price to keep the initial cost down.
The key is selling the options before the company reports its earnings. That means no later than the end of the day on Feb. 11.
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