A decline in the price of a stock after an earnings announcement is not always a bad thing. In fact many trade set-ups are because of this price action. Here is a trade idea on a company that still looks to have plenty of upside potential heading into the summer.
Click to EnlargeBuffalo Wild Wings Inc. (NASDAQ:BWLD): Call Debit Spread
The trade: Buy the June 90/95 Bull Call Spread (buying the June 90 call and selling the June 95 call) for $2.15 or less.
The strategy: The maximum potential profit for this trade is $2.85 ($5.00 – $2.15) if BWLD is trading above $95 at June expiration. The maximum loss is $2.15 (or what was paid for the spread) if BWLD is trading below $90 at June expiration. Breakeven is $92.15 at expiration based on a cost of $2.15.
The rationale: Buffalo Wild Wings announced earnings this past week and despite a solid report, the stock traded lower. Revenue increased by over 20% from the same period a year ago even though net earnings actually fell year over year. A couple of analysts downgraded the stock too, which didn’t do it any favors either. The CEO said that despite the setback in net earnings, she is confident the company can achieve net earnings growth of 17% for 2013.
Despite the earnings setback for the stock, BWLD had been in an uptrend since March of this year. The gap lower could have been partly due to some profit-taking. Taking a look at a two-year chart of the stock, it is trading right at a support area (previous resistance) where it has a good chance of reversing and moving higher again. The stock had been trading close to $96 earlier this week so asking it to move above $95 is not out of the question. A spread trade and wings just sound like they go together!
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