Options Plays You May Want to Make Now

Looking for some option plays to make?  The article below not only gives you some recommendations to consider, it also teaches why you may want to consider these moves.  Even if you’re not interested in any recommendations at the moment, you may learn a new option trading strategy by reading it.

Well, so far, my recommendations that I made last week here on Seeking Alpha have worked out great.

Using a strangle option strategy on Netflix (NFLX) proved to be a nice winner. In fact, the trade exceeded my expectations. This strategy involves buying both out-of-the-money call and put options with the same expiration date. They are purchased pre-earnings on companies that have proven to make big moves after reporting. You really have to be careful, however, in which companies you choose to make this trade with.

An argument can be made that this strategy limits upside potential. While true to a certain extent, I’d much rather have the comfort of knowing that I don’t have to be right on the direction of the trade. That is pure gambling when dealing with earnings releases. I only have to be right in that the stock makes a large move.

I would also like to stress that my strategies are not suited for weekly options or short-term expiring options. Time-value will decay the price of options and volatility decreases substantially after a company reports earnings. All trades made should at the very least extend into the next month forward.

One other thing I would like to mention, as I’ve received a few questions regarding this, is that by the time my articles are published there is anywhere from 2-4 days of trading from the time the article is posted and when a company reports earnings. Obviously, the stock can move quite a bit during that time (Netflix last week is a good example), so take this into consideration and adjust your strike prices accordingly. For instance, last week, Netflix had an almost $9.00 gain from the time of my writing until this past Monday. Instead of a $120.00 strike call, I adjusted that to a $130.00 strike call, and vice versa. For the most part, I recommend placing the strangle trade the day before or on the day that the company reports (depending on if it’s before the opening bell or after the market closes). This makes easier to gauge where you want to buy and place the strike prices at.

In addition to Netflix, both Amazon (AMZN), Akamai (AKAM), and F5 Networks (FFIV) made for some nice trades. I hope you all did well.

Looking ahead to next week, October 31st- November 4th, there are a few companies that immediately grabbed my attention. Some are better plays than others, of course, but I will leave those decisions up to the reader. Let’s get to what I’m looking at and the possible trade scenarios.

Monday, October 31st

Sohu.com, Inc. (SOHU)– reports before the market opens on Monday.

Sohu.com engages in the brand advertising, online gaming, sponsored search, and wireless businesses in China. Its brand advertising business provides advertisements on its portal Websites to companies to enhance brand awareness online; and online gaming business involves in the development, operation, and licensing of multi-player online role-playing games. They were formed in 1996.

Historically, SOHU has proven to be a nice trade around their earnings release. The one major issue I have with SOHU is that they are based in China. Lately, the SEC has been looking into many of these firms allegedly “cooking the books” to make them seem more profitable than they really are. Almost all Chinese technology and internet stocks are way off their 52-week highs.

If you can get past this issue (you may find it even more appealing due to this), then Sohu should deliver. Also, SOHU, unlike many other internet and gaming stocks based in China, is actually a profitable business. Here’s a quick glance at their balance sheet:

Balance Sheet
Total Cash (mrq): 811.41M
Total Cash Per Share (mrq): 21.18
Total Debt (mrq): 0.00
Total Debt/Equity (mrq): N/A
Current Ratio (mrq): 3.51
Book Value Per Share (mrq): 23.58

Currently, SOHU is trading at $57.87/share at Tuesday’s market close. Volatile would be an understatement for how this stock has traded over the past year.

52wk high: 109.3699
52wk low: 46.35
EPS: 4.19
PE: 14.60
Div Rate: N/A
Yield: N/A
Market Cap: 2.22 B
Volume: 1.82 M

Here is how their last earnings release traded from the day before and on the day they reported on August 1, 2011:

Date Open High Low Close Volume
Aug 1, 2011 87.40 87.95 79.00 79.14 5,723,627
Jul 29, 2011 87.41 90.37 85.32 90.10 2,048,463

From a high of $90.37 one day before the release to a low of $79.00 the day of the release (before the opening bell), there is an $11.37 swing, or 12.5%.

Realistically, you can expect a $6.00 – $8.00 move in either direction. I would avoid buying options with strike prices that are near-the-money. Instead, minimize your investment as much as possible by purchasing deep out-of-the-money calls and puts to where you will at least break even on the trade in a worse-case scenario. The upside is that if there is a very large move, then one side of the trade will net you a decent profit.

Analysts have this opinion on SOHU:

Price Target Summary:

Mean Target: 93.98
Median Target: 91.00
High Target: 125.00
Low Target: 73.00
No. of Brokers: 16

See Seeking Alpha for additional plays to consider

Option Trading Secrets

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