Earnings season is always a volatile time because it is the point of maximum uncertainty for every stock on the market. Nobody knows if a company will post a positive earnings surprise or a negative earnings surprise. On top of that, nobody knows how traders are going to respond to those surprises.
That was the situation we found ourselves in for Ball Corporation’s (NYSE:BLL) earnings announcement on Halloween, before the market opened. We weren’t sure if the company was going to beat or miss expectations, and we didn’t know how Wall Street was going to respond.
Well, now we know, and we want to take advantage of the situation by selling a covered call on BLL.
BLL missed revenue estimates by $100 million and missed earnings estimates by $0.33 per share — reporting revenue of $2.95 billion and earnings of $0.27 per share. This was a larger-than-expected miss for the company, and traders let management know they weren’t happy by pushing the stock down to its lowest close in nearly four months.
Unfortunately for BLL, the selling didn’t stop there. The stock has continued falling. Yesterday, it dropped to its lowest level since late June.
While this may be bad for BLL management, it’s great for us. This drop in the value of the stock gives us a wonderful opportunity to generate income using a covered call position.
Lowering Our Strike Price as BLL Drops
We have been holding shares of BLL since our BLL September 20th $77.50 Put Write expired in the money. Since accepting those shares, we have successfully sold two covered calls against BLL.
Originally, BLL was holding above support in the $70-$71 range. We decided the best strike for our original covered calls was $77.50, which was the price we purchased the stock at. We didn’t want to risk having the stock called away for a lower price if BLL bounced up off support or posted particularly strong earnings.
As you can see on the chart below, BLL dropped below that $70-$71 support range after earnings. As regular readers know, old resistance often becomes new support, and old support can become new resistance. With that in mind, we can select a new, lower strike price because resistance in that lower range will likely keep the stock down.
Daily Chart of Ball Corporation (BLL) — Chart Source: TradingView
To ensure we get a good premium, we want to get as close to that new resistance range as possible while still being above it slightly. A strike price around $72.50 should give us an adequate buffer while still letting us collect enough premium.
BLL only offers monthly expiration dates on options. When picking an expiration for this trade, you want to go far enough out that you can collect a decent premium, but not so far that you give the stock too much time to rally. With the monthly expiration for November options in less than two weeks, we definitely recommend a slightly longer-term trade.
To find out which BLL covered calls we’re selling—and to get access to our full portfolio of income-generating trades—sign up for a risk-free trial of Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.