Dear giles,
The problem a lot of people had on this board was what to about earnings. The day before earnings were announced, OO ran up to 12.00 on anticipation of good earnings. Everybody was confused about what to do.
Do I sell before they come out, at 12.00?
But what if earnings are good and the stock shoots up, I left money on the table!
Do I hold til after earnings come out?
But what if they suck and the stock tanks, I lose my profit.
What Sam did was to buy OO April 12.50 calls a couple of weeks before earnings came out. OO was trading around 10.00 so they were very cheap. Only .0625 cents.
Then when the run up to 12.00 came, he sold his stock, locking in his profit.
That way, no matter what happened the next day, he was ahead.
If OO had good earnings, and the price jumped, he would only be giving up .50 (the difference between what he sold his stock for, and what price his calls gave him the option to sell OO for), and would not have left money on the table.
If earning were bad, which they were, he had already sold his stock, and pocketed his profit.
OO July 15.00 calls closed at 1/8 today. If you buy them, you are counting on a run up, close to the earnings annoucement. If it doesn't run up, obviously, the options are useless, unfortunately, you have to make that call now, before the price moves (along with the option price, making it a bad risk/reward ratio to buy the calls).
It all really has to do with your prospects for OO. If you think they are good long term, and the earnings will be good, then no need to try this strategy, unless you want to get greedy and make some extra money on the options (i.e. gambling).
If you think the stock is bad long term, and the earnings are going to be bad, OR you are not sure, this idea might protect you.
Obviously, nothing is guarenteed, and the stock may not move. But it is the tiny options price that allows you to take this tact, not risking very much money, and possibly hedging a large OO positon.
As for the puts, as I said, even if the earnings are bad, I doubt that 12.50 July puts would be profitable in the two days from announcing to expiration. Further out months, and closer strike prices would make the options to pricey to work.
BCL |
