You’ve heard a lot about the whale trade made by the rogue Wall Street trader that cost JPMorgan (NYSE:JPM) billions. How about putting some fat cash in your own portfolio by reeling in a whale of your own?
For us non-Wall Street traders, I define a whale trade as a put or call option contract that appreciates by more than 300% — in one day.
Now that earnings season has begun, it’s officially whale-hunting season. When companies report earnings, big moves can happen in an instant. The landscape is rich for making a whale trade.
Last quarter, there were dozens of whales to reel in. At the top of the list was Netflix (NASDAQ:NFLX). The video rental company caught the market with its pants down. As a result of a massive earnings surprise, its shares soared 50% in the day of trading after the news was released.
Call options did even better, with gains approaching 1,000%.
Of course whale hunting is never easy and the risks are large. That said, for the fun money in your portfolio, why not throw in a line or two? Using the option market you can play the game for as little as a few hundred dollars.
Catch the whale and those hundreds can turn into thousands.
Now that Alcoa (NYSE:AA) has reported results, it’s time to take the fishing boat out to sea. I’m in the crow’s nest on the lookout for whale trades that you can make this week.
Here are three to consider:
Bed Bath & Beyond
Shares of the specialty retailer have fallen sharply since early last summer thanks an unexpected slowdown in profit growth. Bed Bath & Beyond (NASDAQ:BBBY) stock has rallied, along with the rest of the market, since the end of last year. Will investors be disappointed again?
If so, this one could fall hard. At the moment analysts expect the company to grow profits by 10% in the current fiscal year ending Feb. 28, 2014. At current prices shares trade for 13 times forward earnings. That’s a decent premium that will have to be justified by strong earnings. One misstep and down she goes. Put options could soar on this potential whale trade.
The casual restaurant reports earnings results for the first quarter under new leadership. Prior to the new regime Ruby Tuesday was struggling. Ruby Tuesday (NYSE:RT) missed earnings estimates in the last two quarters. Share value plunged to $5.50 per share last summer, but they have rebounded since. Is the move justified?
The company is barely profitable expected to make only 25 cents per share in the current fiscal year ending May 31, 2013. At current prices the stock trades for 30 times expected earnings. That’s a heady number based on a turnaround story that may or may not materialize. The company is now reducing its reliance on couponing and discounts for its customers. That sounds eerily similar to J.C. Penney (NYSE:JCP). If Ruby Tuesday is a similar failure, the stock will fall hard. Puts could make this the whale of the week.
Pier 1 Imports
One turnaround story that is working is Pier 1 Imports (NYSE:PIR). The kitschy home furnishing retailer seems to have survived its brush with death. The company is benefiting from a rebound in the real estate market that is bringing buyers who want to furnish new homes. Its lower price strategy helps bring in customers struggling in this tough economy.
Over the last few quarters Pier 1 has exceeded expectations and each time the stock has rallied in the day of trading thereafter. At the moment, analysts have Pier 1 growing profits by 16% in the current fiscal year ending Feb. 28, 2014. At current prices, the stock trades for 16 times estimated earnings. Given recent performance it is reasonable to assume a repeat performance. This whale should be played on the long side with call options.