October Options Opportunities
October is my favorite month of the year for many reasons. The heat has finally broken in North Carolina (where I live and telecommute to Cabot), temperatures average in the low 70s and it’s always sunny.
And as a bonus, this October, I get to watch my Chicago Cubs win the World Series!
I also love October because it’s the month when most of the companies in the S&P 500 release earnings for the third quarter.
Earnings season is a great time to find the next breakout stars such as earnings winners Netflix, Microsoft and PayPal stock,which all exploded higher last week.
At Cabot Options Trader, we have had great successes over the years buying calls in stocks that had recently gapped higher on earnings.
As an example, on June 3, following a strong gap higher on earnings in Veeva Systems (VEEV) shares and the stock trading at 35, I sent the following trade alert:
Buy Veeva Systems (VEEV) September 36 Calls (exp. 9/16/2016) for $1.95 or less.
Veeva Systems hit my radar last week when the stock jumped on earnings. Since then, the stock has continued to grind higher.
While there has not been a great deal of options trading since that initial gap, the price of options are so cheap that I want to take a speculative shot that the stock is on the verge of breaking out to more new highs.
To execute this order, you need to:
Buy to Open the VEEV September 36 Calls.
The most you can lose on this trade is the premium paid, or $195 per call purchased.
A couple of weeks later, we sold half of the position in PayPal (PYPL) for a quick profit of 26%. And then, in mid-September, with the stock trading $4 above our original entry, we sold the remainder of the position for a profit of 105%.
Similarly, in June, Cabot Options Traders made over 500% on Nvidia (NVDA) calls following an earnings gap.
So which earnings season winner did Cabot Options Trader and Cabot Options Trader Pro subscribers buy in recent days?
While Microsoft (MSFT) and Netflix (NFLX) are still on my watch list for new trades, I recommended a bullish position in PayPal stock.
Following the company’s strong earnings report and guidance on October 21, and subsequent 9% gap higher, my proprietary scanning tool highlighted unusual call buying in the stock.
With the stock already trading higher by 9% on the day, I noted that traders had bought the following calls throughout the day:
Buyer of 9,000 PayPal (PYPL) November 44 Calls for $0.53
Buyer of 8,800 PayPal (PYPL) November 45 Calls for $0.58
I really like the risk/reward on these trades because the calls are extremely cheap and give the trader great leverage if PYPL continues to rise. However, I like to give my trades a bit more time to work. And because the market has been so sloppy and choppy for the past three months, I am targeting upside in PayPal stock in a safer but still lucrative way.
To find out how I’m targeting a move higher in PayPal stock and other earnings season winners, simply sign up for a risk-free trial subscription. Click here to sign up now.
Using the Options Market’s View on Earnings Risk
As I mentioned, I like earnings season for the potential to find the next breakout stars, but I also hate earnings season for the potential for earnings blowups. If a company such as Facebook (FB) misses earnings, there’s the potential for a big fall in the shares.
To keep my subscribers apprised of the risks the options market is pricing in for a company’s earnings report, every day during earnings season, I release a detailed report on the risks for stocks due to report.
Here’s an excerpt from the report I sent to Cabot Options Trader subscribers ahead of Microsoft’s earnings on October 20:
Microsoft (MSFT) earnings 10/20 after the close With the stock trading at 57, the options market is pricing in a move of $2.70, or 54.30 to the downside and 59.70 to the upside.
So where did MSFT close following earnings? 59.66—just $0.04 below the top end of the options market’s expected range.
For stocks that a large percentage of Cabot subscribers own, such as Facebook, Tesla (TSLA) and Apple (AAPL), I release a multi-page earnings report with potential trade and hedging ideas.
And as always, my subscribers have access to me via email for any earnings season concerns or questions.
While I know to expect beautiful weather in October in North Carolina, and a World Series title for the Chicago Cubs, earnings season is full of the unexpected. And because of these risks during earnings season, calls and puts offer us a great way to hedge or participate in a potential big score.
