Dell option play:
Regarding, a couple days' play, just a day prior to earnings: since
almost everyone is saying that it will run up now, and sell-off a bit
right after earnings, the p/e being so high, and the trend in +ve
surprises declining straight in the last four quarters, what are your
thoughts on Sept atm puts bought just prior to earnings and closed a
couple of days later, for a 30% only play? (In the long run, the play
strategy may not be sound, but just for this time around, no?). Or do
you think earnings will be just a non-event? Of course a lot
depends on how the market trend is in the next 3 weeks. [For folks
who are considering DELL puts - why not consider some
ultra-short-term AOL/YHOO/AMZN puts instead ... just a thought!
But may be the high volatility-premiums built into them by now,
makes them mostly unplayable?? ]
I think it would be difficult to make money on Sept puts. The time value will be high at earnings times and will decline more than usual right after earnings, because implied volatility and demand will decline. Also, although I think Dell is going to go down-actually right before earnings-I don't think it will be by that much. When you add on bid/ask spread and commissions, I think it would be difficult to make a good profit. You have to remember that an option price can actually decline even when the stock is moving in such a way that you think the option should go up. A lot of people forget that, in cases of earnings reports, declining volatility and decreased demand right after the report, can actually hurt the option price more than the change in stock prices. Of course, I can't really quantify any of this, and therefore cannot know if your trade will be profitable or not, but it is something to consider. IMHO.
Although risky, I think the best options play for Dell earnings times is to write a Sept 120 call, which you would then close at the end of this month! Even if Dell rises above 120 (not likely), your call won't be exercised, because it will still have a lot of time value. You would benefit from the volatility and demand that will exist right before earnings, increasing the time value of your call and therefore your profits. Right after earnings and for the rest of the month, the time value will decay rapidly because of decreasing volatility and lack of demand, and from the decline in stock prices, allowing you to close your position at the end of the month for much less money than you got in selling the call. Remember, when stock prices only change a little, the greatest profits are had in writing options, not buying them. The 2 big reasons why Dell premiums are so expensive now is because of the big run-up in July (with investors, therefore, expecting more of a run-up) and an earnings announcement coming up. When Dell fails to jump at earnings time, investors' expectations will diminish, and therefore, option premiums, where you, the writer of the call will benefit, and where the call buyer or put buyer can be hurt.
The above reasons are also the reason to wait until the end of this month to buy Sept calls. The July run-up will be a distant memory, and the earnings reported, therefore call buyers will paying for much less time value. I think Dell will reach 130 in mid-September, so if you can buy the Sept 120 real cheap at the end of the month, you might make a hefty profit. Right now, Sept 120 calls on Dell are selling for about 6 1/2, so you can see if Dell only makes it to 130 by Sept expiration (I doubt that it will be much higher than this), buying Sept calls right now would not give much of a profit potential, especially when you factor in the bid/ask and commissions. |
