I call this the 50/50 Earnings Report Scenario
The past couple of days I’ve been trying to figure out how to make a safe small trade that could potentially increase my chances of making it to $1 million in my 10 months goal is what I call the 50/50 earnings report scenario. You take a very volatile stock and buy 50% Puts and 50% Calls way out of the money to earn well over 100% the day before earnings is annouced. If the stock pops very high or low based on a surprise beating wall street analysts or missing analyst estimates you can make money either way. Because 50% of your money will be worth $0, but the other even 50% of your money could double making the 2 trades together profitable.
Say you take Apple Computer Inc. which has had a great year and expected to beat earnings with major increasing sales with new iPod units and iTunes music download service. Let’s also not forgetting the growing market share they are taking in their thriving computers sales of their newer computers. Apple’s price has been up and down on positive and negative news. Its also possible the stock could tank even if the earnings are good, believe me I’ve seen it happen with GRMN.
This time I’m going to play it cool. I’m going to play this earnings game smarter. Since I have received a fat profit with the stock this month I am only going to take a small bit of the profits to go through earnings. So say if the new price targets on AAPL are $110-120 and the price of 1/12/07 is $94 and I expected it to mildy go up 5% that would be around +5.20pts, but I expect AAPL to jump with this bullish market at least 10% making the stock open around $105 at least. If that did happen my way out of the money CALLS would be well over 100% and I could sell out being in the trade less than 1 day. Same options for a PUT. Say AAPL misses or beats but tanks 5-10% down to $80-85 I could still come out a winner. No matter which was the stock moves fast I will be write. If this trade works I could practically use it on every stock that reports earnings.
The math behind it for you to understand is this: The 50/50% earnings report scenario.
If I buy $500 worth of calls for .15 = 30 contracts
I also buy $500 worth of puts for .20 = 25 contracts
AAPL reports earnings = The price jumps up or down 10%
With $500 into 2 trades one will be practically = $0
But the other will be worth at least $2,000-3,000 more.
Summary of the math:
You take your profiting trade minus your loosing -$500 trade = Up +$2000-2500.
I call this the 50/50% earnings scenario trade. Now, if the stock doesn’t move at all you can just sell out of both positions most likely for a even trade with minimal losses except commission costs.
On January 16 I will buy into my positions and on January 17 after Apple Computer reports earnings I will either be +2,000 to add to my goal or just broke even and sell out of my trades.
I really do not think breaking even will be it with all the enthusiatic investors behind AAPL.
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This entry was posted on January 15, 2007 by Paul Awol. It was filed under 2007 option picks, 2007 stock picks, 50/50% earnings report scenario, apple computer blog, how to become a millionaire, stock option trading rules, trading stock options .