3 money-doubling options trades to make right now

There's cash to be made when premium-priced stocks move sharply higher or lower after earnings reports.

By Traders Reserve Nov 8, 2013 6:02PM

Doughnuts are boxed at the Krispy Kreme store on April 15, 2004 in New York City (© Chris Hondros/Getty Images)By Jamie Dlugosch

 

A troubling trend seems to be forming in the market. Stocks doing well at the moment tend to be large with little debt and big cash flows -- cash flows that are then returned to investors in the form of dividends. It’s a defensive strategy -- nothing that will make you rich.

 

If you hanker for something a bit more aggressive, this might be the trick: fast-money option trades that home in on stocks likely to move higher or lower just after reporting earnings.

 

These option trades can double your money or more in less than one day of trading.

 

Even better, during the current quarter there has been a discernible trend that you can capitalize on in a big way. Specifically, premium-priced stocks that miss earnings expectations are falling by 10% or more in many cases.

 

The past week’s list of big losers include Whole Foods (WFM), Noodles & Co. (NDLS) and Wendy’s (WEN). All fell sharply after disappointing earnings.

 

The best way to capitalize on these losers is with put options. Generally speaking, a put option will go up in value when a stock goes down.

 

Here are three companies reporting results next week that look primed for big money option gains:


DSW Inc. (DSW)

The shoe retailer reports earnings results on Nov. 18. It is not a good time for retailers. The holiday season is shorter this year and consumer confidence is teetering thanks to the government shutdown and a slow growth economy.

 

DSW shares are perched near their 52-week highs and its valuation is at a premium. Shares currently trade for 23 times current fiscal year estimated earnings. Wall Street is looking for profit growth of 14% from the current year to the next. I expect results to not be nearly enough to keep shares at current levels. In addition there is a risk of downward guidance for the future. Put options here are the way to go.

 

Krispy Kreme (KKD)

This seller of fancy donuts and coffee reports earnings results on Nov. 18. We’ve seen Krispy Kreme collapse before. Could this be a repeat performance? I think so, especially given the current valuation of shares.

 

The stock has been on a tear as momentum investors plow their dough into the company. The rally has become excessive and puts the stock at risk for a correction similar to what happened with Wendy’s and Noodles & Co. last week.

 

Analysts expect Krispy to grow profits by 21% from the current fiscal year to the next. That is certainly an impressive number, but with the stock trading for 39 times current fiscal year estimated earnings, it will take a perfect report to keep investors from selling this one. In this market, the probability of a miss and subsequent share collapse makes owning puts on Krispy Kreme the right call.

 
Salesforce.com (CRM)

Salesforce.com reports results on Nov. 18. Tesla Motors (TSLA) is a good example of what happens to a stock that has simply gone too far.

 

The cloud-computing space is full of intriguing speculation. With respect to Salesforce.com, its future prospects has resulted in a frothy stock price. Wall Street expects the company to grow profits by 64% from the current fiscal year to the next. Again that is a very impressive and intoxicating number -- no wonder investors got drunk on the stock. That said, shares are richly priced trading for 165 times current fiscal year estimated earnings.

 

If you look at performance against expectations, Salesforce.com has only managed to match expectations in two of the last four quarters. That is just not good enough in a teetering market. I expect a 10% pullback or more after results making puts the right side of the trade in advance of earnings.

 
More from Traders Reserve


8Comments
Nov 11, 2013 1:42PM
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That's it. Tell a bunch of amateur investors to speculate with short-term put options. What could go wrong?
Nov 11, 2013 8:42AM
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Happy Veteran's Day....To All  Active, Retired, and Disabled Veterans that Served...
Nov 11, 2013 2:21PM
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My Scots Grandfather was found of saying that the best way to double your money was to fold it once and put in your pocket. His algorithm has never been wrong and I've never lost one penny by following it.
Nov 11, 2013 10:07PM
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The best investment is always hookers!
Nov 13, 2013 2:51PM
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KKD has beat expectation two times and missed two times in the last 4 quarters.  I like a strangle on KKD at $25.00.

Nov 13, 2013 2:20PM
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"Salesforce.com has only managed to match expectations in two of the last four quarters."

That is not exactly true  ... Yahoo Finance shows CRM Matching Expectations in two lof the last four quarters and beating expectations in two of the last four quarters.  Beating last quarter by 28% or 2 cents. While they will be sold hard if they miss ... there is loads of upside if they beat. The shares have  74.5% of the float short and a ratio of 11.3 days to cover. I like a straddle at $57 and calls at $57 and $58.

Nov 9, 2013 11:42AM
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Buy JCP at $8 and sell the Jan 2016 $10 calls at $3 or Buy ABX at $18 and sell the Jan 2015 calls at $2.57. You then have to keep you eye on the ball and finger on the trigger.
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