Here’s my big earnings report play

  • May 9, 2006
  • Andy Swan


Andy Swan created and
co-founded DaytradeTeam five years ago on a principle of empowering
individual stock and options traders with the techniques and analysis methods
typically reserved for elite professionals. His expertise in technical analysis
and commitment to educating members earned DaytradeTeam a top-ranking among
advisory services for several years.

Each quarter I like to come up with the one
earnings play that I think has the best chance to make a nice, quick profit. Of
course, trading stocks into an earnings report is extremely risky and something
I very rarely do, so please read this entire article before jumping in!

The big earnings play for tonight is Symantec Corporation
(
SYMC |
Quote |
Chart |
News |
PowerRating). There are
a few compelling reasons why I believe SYMC could beat estimates AND raise
guidance for future quarters, producing a sharp move higher in the stock:

  • The technicals show strong support and a
    reversal! Look, earnings plays are educated guesses, so if I’m wrong, I want
    to have the technicals on my side to minimize the damage. SYMC does just that
    by starting a new uptrend channel and setting up great for an entry here near
    the support line of 16.75

  • Competitors, customers and suppliers are
    performing well. Online security is coming back to the forefront, and SYMC is
    a leader…..although DELL’s
    (
    DELL |
    Quote |
    Chart |
    News |
    PowerRating)     warning last night is making me want
    to hedge my bet a little here.

  • Analyst ratings have trended higher. Analysts
    rarely raise forecasts for the upcoming quarter without having good reason to
    do so….the only question is, has the market already priced in solid
    guidance?

* Note How Analysts have gotten more positive in
the last month

So, how do I play this earnings report?

Obviously, the purest way to do this is to just buy the stock for an overnight
gapper trade, expecting the earnings results to boost the stock higher.
Unfortunately, this exposes you to large amounts of risk, because if SYMC
disappoints, the stock could easily move 10% lower overnight. So I’m not going
to put $25,000 into this quarter’s earnings report…

A more effective way to play this earnings report is to buy OCT $17.5 call
options (SYQJW) that are slightly out of the money. This has a twofold effect:

First, the longer time between now and the expiration date means that you will
not lose much in the way of time-premium overnight (as those who buy the May or
JUN options will) should the earnings report come in fairly neutral or even
disappointing.

Secondly, with a delta of .54 on these calls, you can expect to see a
significant increase in both the price of the option and the speed at which that
price is accelerating should SYMC beat earnings expectations and the stock move
higher as I expect. In other words, you keep your risk in check and allow
yourself to maximize profits if correct….which pretty much sums up my entire
trading philosophy!

I will likely grab six or seven contracts of these call options later today
ahead of the report for a total investment of just under $1,000 (like I said, I
don’t like to risk a lot on an earnings play!) If things go poorly, I’ll
probably end up taking a $350 or so loss. On the other hand, if things go as
well for SYMC as I expect tonight, I could easily double my money on the
position overnight.

The Bottom Line

I think SYMC is going to do very well tonight, so I’m going to take a small
position in some options that limit my risk if I’m wrong….but give me an
opportunity to make a really nice score off of the trade if I’m right.

I hope that this earnings play gives you some insight into the approach that I
take to trading. So many traders think only in terms of up or down, and miss the
larger picture of reducing risk and maximizing profits.

Andy Swan

co-founder, DaytradeTeam