Hello all. I see that Dell closed down today. Unusual being so close to earnings. Nonetheless, I still think it has a chance to touch 115 by Tuesday morning. Maybe a little higher, if it's not dragged down by negative market news or pessimism. During this past year, options expiration week has been a good week for stocks, so this factor plus imminent earnings announcement might push Dell up to 115 or a little higher. Just don't risk what you can't afford to lose.
I wanted to give another example why the option premium declines so much after earnings. Take all you call holders out there. Why did you buy Dell calls? Because you're hoping to make a killing if Dell posts great numbers, which you think it will. IMO, Dell isn't going to soar even if it did post great numbers, because high expectations are already built into the price. So what happens if Dell doesn't rise significantly? All you call holders are going to want to sell to get whatever premium you have left. But, there will be few takers because if Dell doesn't rise significantly after earnings, it probably won't rise much in the 3 days left before expiration. So what does many sellers and few buyers mean? Lower prices! This is why the premium collapses after the earnings report if the stock doesn't shoot up, and, it probably won't for the reasons that I have already mentioned. You can see the price differential by looking at Aug 110 calls for DELL and MSFT. Microsoft is only about a dollar cheaper now, and yet, the Aug 110 call is selling for about 1/4. The Dell Aug 110 is selling for literally 10 times that amount, at about 2 1/2! This gives you a good idea of how much the price is going to collapse if Dell doesn't soar, even if it just stays in its current price range. That's what you must be wary of.
Well, folks, I'm moving this weekend, so I won't be back here for a while. In fact, I probably won't be back until after Dell reports earnings. I'm sure many of you are overjoyed. I could be wrong about what happens to Dell. I have been wrong many times before, and I'm sure that it will happen many more times again. I only wish you all good luck! |
