By Greg jensen
This week, as this earnings season draws to a close, there are several releases that are worth following. In general this quarter has been positive, with two thirds of companies beating expectations on the bottom line. Expectations were lowered by many analysts following a disappointing third quarter, so this season has had a “could have been worse” feel to it. Of course, those with options knowledge and experience see earnings releases a little differently. They can play volatility and/or direction, and often are looking for potential of a surprise, regardless of whether the miss is good or bad.
Skullcandy (SKUL), who releases on Wednesday, certainly fit that bill.
SKUL is a much followed and talked about stock that has seen serious decline over the last year. Thus, any deviation from expectations may produce an overreaction. If you followed the trade idea given here you are sitting pretty. The short term puts have expired worthless and you now own March $6.00 puts, which last traded at $0.35, for a net $0.10. If you didn’t and want to get in on the action, then a simple straddle to benefit from any volatility may well pay off, while limiting potential losses.
Herbalife (HLF) is another company that has, to say the least, seen a vocal difference of opinion regarding their potential.
The much publicized and very public spat between short-seller Bill Ackman and buyer Carl Icahn is starting to look like a win for Icahn after he declared a 13% stake and shares jumped 10% last week. Tuesday’s earnings release by HLF is another that will be closely watched, and offers the potential for an exaggerated reaction to any deviation from revenue and earnings expectations. Once again a straddle could benefit as one big player tries to squeeze the other after the company reports.
Terex Corp. (TEX) also reports on Tuesday, but is a different proposition.
The stock has been in a solid upward trend for around 8 months and has consistently beaten expectations for both top and bottom line over the last year. The equipment manufacturer, best known for their cranes, has benefitted enormously from the recovery in housing and the general grinding economic recovery. With TEX, it is not that I don’t expect them to do well. Rather it is that expectations are becoming a little inflated. Consensus EPS estimates for this quarter are at about $0.39/share, a 50% increase from the same quarter last year. Even given this, many traders will be expecting another beat, so reaction to a good number may be muted. Should there be any hint of weakness in the report, however, the move down could be swift and sharp. Close to the money puts offer a potentially nice payout if that happens, again with a limited downside.
With options, as with any trading, finding opportunities is a key to success. Earnings season presents plenty of them, don’t get left out!
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