It’s hard to believe that we are already into July. What is even harder to believe as traders is that earnings season is back and ready to kick off. Here is a trade idea on a stock that could profit right before the company is set to announce earnings:
Amgen (AMGN — $97.64): Call Credit Spread
The trade: Sell the July 100/105 Call Credit Spread (selling the July 100 call and buying the July 105 call) for 70 cents or better.
The strategy: The maximum potential profit for this trade is 70 cents if AMGN is trading below $100 at July expiration; both call options would expire worthless. The maximum loss is $4.30 (5 – 0.70) if AMGN is trading above $105 at July expiration. Breakeven is $100.70 at expiration based on a credit of 70 cents.
The rationale: This trade idea basically forgoes the fundamentals of the company and is mainly concerned with time and the stock chart. That being said, there is some news about the company just last week. Amgen’s bid to acquire Onyx Pharmaceuticals (ONXX) was recently rejected; Amgen might be on the hunt for another acquisition, which often isn’t very conducive for stock gains — at least not from the onset.
Click to Enlarge With two weeks to go until July expiration, this trade idea is counting on Amgen stock to stay below the $100 area. Only once since the beginning of June has the stock been able to close above that mark. Currently, AMGN is looking trendless and unconvinced about where it wants to head, but the 200-day simple moving average — which is just below — might be a nice destination, especially for this spread.
What also makes this trade idea appealing is that current implied volatility is higher than historical levels, which often can be beneficial to those selling a credit spread.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.