## Saturday, November 7, 2009

### PCLN EARNINGS PLAY

ODDS/PROBABILITIES

PCLN earnings since 1999, a total of 42 (N=42)

Earnings with less than 10% move= 14, which is 33%

Earnings with 10-20% move- 18, which is 42%

Earnings with more than 20% move- 10, which is 24%

In summary, the odds of PCLN moving more than 10% after earnings is 67%

BROKER PRICE TARGET

PRICE TARGET SUMMARY

Mean Target: 195.08

Median Target: 200.00

High Target: 235.00

Low Target: 150.00

No. of Brokers: 13

JPM and Kaufman Bros have 200-210 as the price target on PCLN. It has no resistance until 200-210, which was the support in May 2006! Isn't that amazing the analyst price target and the next resistance level match exactly.

With so many shorts waiting to pounce on it for earnings, I will not be surprised to see it going to 200 in one final short squeeze climax

STRATEGY

I usually close my options the day after earnings but with PCLN I may keep it until Nov opex with the following strategy

50% BF Call spread (180/200/220) and 50% BF Put spread (165/145/125). Looks like low risk and good reward to me as long as PCLN closes between 190-200 or between 145-155 at opex.

Is the above strategy better than 50% Nov 165/150 put spread and 50% Nov 180/195 call spread strategy?

The above strategy is subject to change. I will update what strategy I employ tomorrow between 3-4 PM

UPDATE: Bought Nov 180/200 call spread ONLY. I rarely do this but this one is a pure Lotto play.

For a high reward strategy, visit Annamall's website.

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hai pramod..

ReplyDeletedo you mean that you are going to set the 2 spread?

put n call? for debit or credit?

looks like iron condor?

and i see that you always play withe earnings?

Dear soem,

ReplyDeleteYes, it is similar to an Iron condor with a slight bullish bias. when I am not sure about the direction, I usually do stangle/straddles or call and put spreads when the options have a high premium. The strategy I posted has a profit range of 0-75% depending on how much percentage PCLN moves. If it moves less than 5%, which has a very low probability, I may lose 10% of my investment.

GL

sorry for asking a simple question.

ReplyDeletedo you get a credit? if so, it will be like this?

SELL -1 IRON CONDOR PCLN 100 NOV 09 180/195/165/160 CALL/PUT @5.45 LMT

i dont think it is a bullish or it is so?

or just the other side?

and you always look at the probability of the earning as the basic information for your earning position isnt it?

thanx

The debit for Nov 165/150 put spread would be 4.00 (Max return of 14-15, i.e., about 250%) and the debit for Nov 180/195 call spread would be 3.5 (Max return of 14-15, i.e., about 280%)

ReplyDeleteIf I am planning to deploy 2K in this trade, I would probably use $900-1000 for the put spread and 1000-1100 for the call spread.

oh i see..

ReplyDeletebut pra,sorry again,put spread is about 4.00 and the maximum gain is about 10.97. how canit be 14-15

i see in my risk graph max is 10.97

and the call spread is 11.40

and if i am not mistaken if you take this two,the risk will be 7.5 and the reward is about 7.5. just 100%

i dont get it what you are posting

sorry cause i am a newbie..

thanx

Dear Soem,

ReplyDeleteI use Optionsxpress to calculate theoretical vaule. When I entered 220 as the trading value for PCLN, the theoretical value of Nov 180 calls is 40.50 and for Nov 195 is 26. The difference comes to 14.50.

This is the breakdown of theoretical value of call and put spreads based on PCLN price after earnings-

PCLN trades at 210: the call spread will be 13

PCLN trades at 200: Call spread will be 11.50

PCLN trades at 190: call spread will be 8.5 and the put spread will be 0.6

PCLN trades at 180: call spread will be 5 and put spread will be 1.6

PCLN trades at 170: put spread will be 4 and call spread will be 2.50

PCLN trades at 160: put spread will be 7 and call spread will be 1

PCLN trades at 150: Put spread will be 11.50

PCLN trades at 140: put spread will be 13

PCLN trades at 130: put spread will be 15

You need 20% or greater move to get 250-300% returns.

The only way you lose money is if PCLN trades between 170 and 180 because your spreads will trade at 6.5-6.6 and assuming cost price is 7.5 (4.0 for put spread and 3.5 for call spread), it is about 10-15% loss. Above 180 and below 160, you should make 0.1-75% profit

ReplyDeleteI meant above 180 and below 170, you should make 0.1-75% profit

ReplyDeletethanx pramod

ReplyDeletewhat a full explanation..

but that i stil dont understand..

it that the theoritical value dosent move?

the theoretical value of Nov 180 calls is 40.50 and for Nov 195 is 26.

it will change due of time isnt it?

you dont use the analyze graph to see where the exactly profit/loss will be when the price is moving..

i just dont get it

it should be 100%

i use TOS.

can i send you picture?

sorry for my acknowledgement..

Dear Soem,

ReplyDeleteI am talking about the theoretical values the day after earnings and not at options expiration. I always close my options within a day or two after earnings.

Say if PCLN is trading at 210 the day after earnings, both 180 and 195 calls will be ITM. The 180 call will trade at 30-31 (210-180) and the 195 call will trade at 15-16, so the difference will be 14-15, which will be 280% returns for the call spread (Cost basis is 3.5 and return is 14-15). HOWEVER, YOUR OVERALL RETURN WILL NOT BE 280% BECAUSE YOUR PUT SPREAD HAS LOST VALUE.

IF YOU PUT 1K EACH IN CALL AND PUT SPREAD AND IF PCLN GOES TO 210, THE CALL SPREAD WILL BE TRADING AT 3.5 AND THE PUT SPREAD WILL BE ZERO. SO YOUR 2K INVESTMENT WILL BE 3.5K, WHICH IS A 75% RETURN.

HENCE MY REASONING THE RETURN WILL BE BETWEEN 0.1-75% IF PCLN IS ABOVE 180 OR BELOW 160 THE DAY AFTER EARNINGS

IF YOU PUT 1K EACH IN CALL AND PUT SPREAD AND IF PCLN GOES TO 210, THE CALL SPREAD WILL BE TRADING AT 3.5K AND THE PUT SPREAD WILL BE ZERO. SO YOUR 2K INVESTMENT WILL BE 3.5K, WHICH IS A 75% RETURN.

ReplyDeleteHENCE MY REASONING THE RETURN WILL BE BETWEEN 0.1-75% IF PCLN IS ABOVE 180 OR BELOW 160 THE DAY AFTER EARNINGS

oh i get it..

ReplyDeletejust the day after the earning...

do you play most of earning time??

i see it is quite a little gambling

but from your odds and probability, i think it will make sense of it

good risk and reward..

by the way

how you get the number of odds and probability of earning? thax

Dear Soem,

ReplyDeleteWith the strategy I posted, you may lose 10-15% if PCLN is between 160-180 the day after earnings. However, if it trades above 180 or below 160, which has a high probability, you can make up to 75% profit. If it trades either at 150 or 210, the profit would be 60-75%. The max loss would be 15% and the max gain would be 60-75%. In summary, it is a low risk, low-medium reward strategy for me.

Do you play most of earning time??

The answer is NO. I do earnings play only if

1. The stock has a high short interest. My cut off is at least 15-20% short interest for stocks with less than 100 million shares outstanding and at least 10% for stocks with more than 100 million shares outstanding AND

2. There is a high probability that it will move more than 10% after earnings

How you get the number of odds and probability of earning?

http://busystock.com/earning.php?cap=%3E5000

and type in the symbol at the top right hand corner to look at the past earnings history.