Options: 3 Big Blue Chips to Trade Before Earnings

by Joseph Hargett | April 23, 2014 12:46 pm

Options: 3 Big Blue Chips to Trade Before Earnings

With a flood of earnings due out again this week, the technology sector will come under heavy scrutiny. Several key tech players will be stepping into the limelight, including online retailing heavyweight Amazon (NASDAQ:AMZN[1]), Chinese juggernaut Baidu (NASDAQ:BIDU[2]) and Internet radio sensation Pandora (NYSE:P[3]).

Technology185 Options: 3 Big Blue Chips to Trade Before Earnings[4]
Source: Flickr[5]

Wall Street will be looking closely at these results, especially in light of the recent correction, which was led lower by momentum stocks within the technology sector. Overall, the Technology SPDR (NYSEARCA:XLK[6]) is in the process of rebounding, but continued success will depend heavily on reactions to this week’s cadre of quarterly reports.

Can AMZN, BIDU and P all help keep the ball rolling? Read on and we’ll take a look at trading ideas for this trio ahead of earnings.

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Amazon (AMZN)

042314AMZN 300x247 Options: 3 Big Blue Chips to Trade Before Earnings
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Internet bellwether Amazon (NASDAQ:AMZN[1]) will step into the earnings confessional after the bell Thursday. Wall Street is looking for earnings of 24 cents per share on revenue of $19.4 billion. That said, current-quarter performance may take a backseat to any data on Fire TV sales, or the effects of the Prime membership price increase[8], as both of these factors could play a key role in guidance.

Expectations among analysts and investors are considerably bullish for AMZN stock. Currently, 35 of the 44 analysts following AMZN rate the shares a “buy” or better, compared to nine “holds” and no “sells.” Elsewhere, options traders are a bit call heavy, with Amazon’s weekly April 26 put/call open interest ratio arriving a 0.74 — calls (or bets that AMZN stock will rally) are easily outnumbering puts (or bets that Amazon stock will decline).

Overall, implieds for weekly April 26 options are pricing in a potential post-earnings move of about 7%, placing the upper bound near $353.75 and the lower bound near $306.25. With AMZN stock in rebound mode, and new product data in the mix with Fire TV, I’m inclined to bet on a post-report rally.

2 Options Trades for AMZN Stock

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Baidu (BIDU)

042314BIDU 300x247 Options: 3 Big Blue Chips to Trade Before Earnings
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Chinese Internet giant Baidu (NASDAQ:BIDU[2]) will follow Amazon onto the earnings stage on Thursday. Chinese Internet stocks are expected to perform well this quarter, as evidenced by Alibaba’s earnings data released in Yahoo’s (NASDAQ:YHOO[10]) recent quarterly report. For the record, analysts are expecting Baidu earnings of $1.03 per share on revenue of $1.5 billion.

Sentiment is quite bullish on all fronts ahead of Baidu earnings. Wall Street has doled out 27 “buy” ratings, according to Thomson/First Call data, compared to seven “holds,” and just one “sell” rating. Options traders are also on the bullish bandwagon, with BIDU stock’s weekly April 26 put/call open interest ratio of 0.65 revealing a considerable preference for calls over puts.

Implieds for weekly April 26 options are pricing in a potential post-earnings move of about 6% for BIDU stock. This places the upper bound near $172.65 and the lower bound at $152.35. BIDU is currently rebounding from support in the $150 region, which is home to the stock’s 200-day moving average. The shares are currently challenging their 50-day trendline, and a breakout here clears the way to the next resistance level near $175.

Bull Call Spreads on BIDU Stock

With solid price action and indications of strong growth in the Chinese Internet sector, traders might want to consider a BIDU May $160-$170 bull call spread. At last check, this spread was offered at $4.35, or $435 per pair of contracts. Breakeven lies at $164.35, while a maximum profit of $5.65 is possible if BIDU stock closes at or above $170 when May options expire.

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Pandora (NYSE:P)

042314P 300x247 Options: 3 Big Blue Chips to Trade Before Earnings
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Finally, we arrive at up-and-coming Internet radio broadcaster Pandora (NYSE:P[3]). The company is expected to post a loss of 14 cents per share after the close of trading on Thursday, with guidance ranging from a loss of 14 cents to a loss of 16 cents per share. Revenue is expected to arrive at $175 million.

Some on Wall Street might be expecting Pandora earnings to top the consensus estimate, especially considering the company’s strong subscriber growth in 2014. The company grew market share to 9.11% in the year ending in March, year-over-year listener hour growth arriving at 14%. As a result, P stock has attracted 20 “buys,” versus nine “holds” and two “sells.”

This enthusiasm ends with the brokerage community, however. For one, short interest totals 14.5 million shares, or 8.28% of P stock’s total float, or shares available for public trading. And if these shorts are nervous about a rally, it isn’t showing in P’s options data. In fact, the weekly April 26 put/call ratio has ballooned to a hefty reading of 1.21, with puts easily outnumber calls in this soon-to-expire series.

Technically, the stock deserves some criticism given the recent correction, but P stock has rebounded considerably off its recent lows. Shares are now back above their 200-day moving average and are looking to reclaim the $30 level as support. Resistance could emerge near $33, as P’s 50-day trendline resides here, but post-earnings momentum could eclipse this hurdle.

P stock’s weekly April 26 option implieds are pricing in a potentially sizeable post-earnings move of about 11%. This places the upper bound near $32.17, while the lower bound lies at $25.83.

Bull Call Spreads on P Stock

Those looking for an earnings induced rally might want to consider a May $29/$33 bull call spread. At the close of trading on Tuesday, this spread was offered at $1.30, or $135 per pair of contracts. Breakeven lies at $30.30, while a maximum profit of $2.70 is possible if P stock closes at or above $33 when May options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

Endnotes:
  1. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  2. BIDU: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIDU
  3. P: http://studio-5.financialcontent.com/investplace/quote?Symbol=P
  4. [Image]: http://investorplace.com/wp-content/uploads/2013/07/Technology185.jpg
  5. Flickr: http://www.flickr.com/photos/jarleon/8577124394/
  6. XLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLK
  7. Next Page: http://investorplace.com/2014/04/amzn-bidu-p-blue-chips/2/
  8. may take a backseat to any data on Fire TV sales, or the effects of the Prime membership price increase: http://investorplace.com/2014/04/amzn-stock-amazons-earnings/
  9. Next Page: http://investorplace.com/2014/04/amzn-bidu-p-blue-chips/3/
  10. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  11. Next Page: http://investorplace.com/2014/04/amzn-bidu-p-blue-chips/4/

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