Here's a technique that Sam Nizam used last quarter to lock in his OO profits. It may work for some of you depending on your outlook for Oakley.
Sam bought April 12.5 calls a couple of weeks before the Q1 earnings were released, at that time, OO was around 10.00 and since there was little or no time value in the options, they were selling for around .0625. Then on earnings anticipation, OO began trading higher and closed at 12.00. Sam sold right before the close and locked in the 12.00 price for his stock. If earnings came out good, and the stock took a pop up, he could still sell at 12.5 because of his options (or excercise the options for a profit) on that day (thurs the 17th) or before the close of the next (friday the 18th).
Here's how it would work this time.
Three things can happen to OO after earnings come out.
1. Price pops higher
2. Price tanks
3. Price stays the same
Now, OO July 15.00 calls are trading for about .25 right now. For every 100 dollars, you get 4 contracts of OO (100 shares per contract). So for every 100 dollars, you can hedge (currently) $5,300 worth of OO stock (or $6,000 worth if OO trades at or near 15.00 before earnings). Depending on the size position you have, you can determine how much, if any, you would want to hedge.
For this to work, OO would have to trade pretty close to 15.00 prior to earnings, which we can't predict, but obviously, the reason you can get options for 1/4 is because they are out of the money now.
If OO trades at a price that you are willing to take on the day before earnings, you sell before the close, take your profit and see what happens.
Basically, you are paying for insurance.
1 . If OO goes down prior to earnings, you are out your "premium" that you paid for your "insurance."
2. If OO trades up to, or above a price that you are willing to take, the day before the earnings come out, you sell, and take your profit.
a. If earnings are bad, and the stock tanks, you already locked in your profit, minus your options cost. (Remember, you wouldn't have sold the stock in the first place if you didn't have the options, and would be losing money now).
b. If earnings are good, you sell the options after the stock pops higher, and before they expire on the close Friday (if they are more that 3/4 in the money [OO trading more than 15.75], then
they will automatically excercise them for you at close. In this
case, you locked in you profit, but still benefited from the good earnings, all the while, having insurance in the case that they
were bad.
Obviously, if you don't want to take profits on OO and still want to have it, either way, after earnings, then you problably don't want to try this (unless you want to gamble on a good earnings report).
Remember, the closer the stock price goes to 15.00 the more the option will increase, so if you want to try it, you should buy them before the move (if it happens at all) takes place. Even though the price of the options could theoretically get cheaper as we get closer to expiration if the price doesn't move up, when you are talking about the differenc between .125 and .0625, you are really getting "pennywise and pound foolish."
You could also, theoretically see if the price gets close to 15.00 before earnings and buy puts in order to protect you if the earnings are bad. The only problem with that is, that the "cheap" option would be the 12.5, and even with bad earnings, 2.5 points would be hard to do in two days before expiration.
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