Speed Retirement August 31, 2011 Earnings Straddle Example How to Find Hot Stocks

Background Last week we discussed the earnings straddle Trade and one of the members asked about Trading ARUN into it’s earnings announcement. I mentioned I would follow the trade and share The results. Here are the results.

ARUN Earnings ARUN was set to report it’s earnings the day after our last webinar, on Thursday August 25, 2011, after the market close. The stock closed at $17.33 on 8/25/11 August $17.50 Call closed at $1.95 August $17.50 Put closed at $1.65 Total Cost for Straddle = $3.60

Let’s look at the 60 minute chart at 10:40 est. A little over 1 hour after the open.

Let’s take a quick poll …

If you saw the 1 st 60 minute bar on ARUN the day of the earnings release, what would you do? 1. Sell the Calls only – 29% 2. Sell the Puts only – 21% 3. Sell both the puts & Calls-21% 4. I would do nothing-29%

After the 1 st 60 minute bar, the value of the straddle was $3.70 and you paid $3.60 for it the prior day. So, you had only a $.10 profit in the position after the 1 st hour.

If you said, you would sell the puts based on the violation of the high of the 1 st 60 minute bar, you would have been correct!

Let’s see what happened by the end of the day …

Let’s take another quick poll … What is the price objective based on the Inside Day? 1. $25 – 25% 2. $18 – 18% 3. $22 – 46% 4. I have no idea – 46%

If you answered $22, you would be correct! Here is how we project that price …

Just for grins, let’s look at the 60 minute chart of ARUN for today ….

Let’s look at the results…

If you sold the Put at 10:40 and kept the Calls and sold the calls them when the stock stalled … Loss on put – 1.65 – 80 = (.85) Gain on Call 4.30 – 1.95 = 2.35 Net Gain = $ / 360 = 41.7% for 1 Day

If you sold both the Call & Put at the market close … $17 Call - $4.00 – 1.95 = 2.05 $17 Put -.40 – 1.65 = (1.25) Net gain = $ / 360 = 22.2% for 1 Day Still not too bad!!!

If you held out for the $22 price objective, the August $17 calls were worth at high as $4.90. Sidenote: On Monday’s Close they Calls closed at $4.70

As a final comment, ARUN gapped up 1.46 or about 8% based on the earnings announcement, which was really not that big. But, you still earned a little over 22% for one day if you sold on Close.

Here is another deal that reported the same day as ARUN…

OVTI Results Thursday Closing Prices- $25 Call - $2.60 $25 Put - $2.40 Total Cost - $5.00

OVTI Friday Closing prices $25 Call.05 $25 Put 7.70 Total Value $7.75 Total Gain – = / 500 = 55% for 1 Day

How to Find Hot Stocks Special Supplement for Market Sell offs

As the market is selling off, that is the time to build your watch lists. You want to be prepared for when the market does reverse to the upside.

I want to discuss a simple way to create a list of strong stocks. This is in addition to the methods I share in the “How to Create a Watchlist Video”, such as Insider Buying.

You want to go to this site:

This site provides a wealth of information.

The basic idea is you want to scan for high performing stocks during a market turndown.

This is how I do it. On the Descriptive page, I check off “Optionable”. Then I scan for “Performance” under the Technical page.

You can get really crazy playing with all the scan parameters. But, the bottom line is you want to find stocks that have or are moving up as the market is moving down.

Thanks for Watching! Speed Retirement © 2011