3 Big-Money Trades on Earnings Reports

by Lawrence Meyers | April 29, 2014 11:12 am

The market is getting volatile, and we are right in the middle of earnings season.

That means there could be some profitable trading opportunities for those with moderate to high risk-tolerance.

There are several stocks I watch in periods like this, so I’ll clue you in to what to look for. But in general, I like going after big, blue-chip stocks that either have a tendency of getting jumpy around earnings reports, or ones that have already reported and are moving pretty significantly.

So, here’s a look at three big-money trades on earnings:

Big-Money Trades: Wynn Resorts (WYNN)

[1]Earnings Report: Thursday, May 1, after the bell

Wynn Resorts (WYNN[2]) is a great trading stock. See, WYNN stock often moves on little or no news. Even the slightest bit of bad news from the gaming sector can slam it, whereas a few quarters of good news can send it soaring. That kind of unpredictable behavior makes for great option trades.

As I write, WYNN stock is trading roughly 20% off its 52-week high of $249.31. I frankly have no idea what the company will report, but if you are bullish, I would sell the WYNN stock May 9 naked $195 puts, which are going for $8.50. I would use the proceeds plus a little cash to purchase the May 17 $200 calls for $9.50. You are therefore putting up only $100 net cash, so if the stock moves above $201 before May 17, you’ll be ahead.

If you are bearish, sell the May 9 $200 naked calls for $8.30. Use the proceeds and a little cash to buy the May 17 $195 puts for $9.40. That costs you $110 net cash, and you profit if the stock falls below $193.90.

Big-Money Trades: Amazon (AMZN)

Earnings Report: Has reported

Amazon (AMZN[3]) is undergoing bearish activity after its earnings report. I don’t value the company based on earnings because it’s one of these oddities that is about the very long-term play across multiple platforms and services. Traditionally, when AMZN stock falls a great deal from its high, buyers tend to get rewarded over the medium term.

AMZN stock high was $408. Today it is at $293 — approaching a 30% selloff. That’s a great time to either just go long, or to sell a naked put. I would go with a naked put that has a far-flung expiration date to capture a big premium.

The October $280 Put is selling for $19. That’s a great deal. If it gets put to you, you get the stock at an effective price of $261 — some 35% off its high. If not, you have collected a delicious $1,900.

Big-Money Trades: Express Scripts (ESRX)

Earnings Report: Tuesday, April 29, after the bell

Express Scripts (ESRX[4]) is giving you a great opportunity. ESRX is a leader in the prescription drug services sector, now trading 13% off its high at $70.50. With a 15% long-term EPS growth rate, and FY14 earnings expected to be $4.95, the company is finally trading below fair value of $75.

You could just buy ESRX stock right here if you liked, and purchase a put and a call to cover both sides of the trade after earnings. My preferred plan is to just sell the May $70 put for $1.75, then purchase the May $70 call for $2.10. It will be a net outlay of $35.

If ESRX stock gets put to you, then rejoice at getting it at below fair value. If the stock rises, you own a call, so you profit on the upside.

Lawrence Meyers does not presently have a position in any security mentioned. However, he may initiate a short on NFLX, and go long on AMZN in the next few days. He is president of PDL Broker, Inc.[5], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books [6]and blogs about public policy, journalistic integrity, popular culture, and world affairs[7]. Contact him at pdlcapital66@gmail.com[8] and follow his tweets at @ichabodscranium.

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