When is a Good Time to Invest in Stock Options?

With earnings coming out next week, it may be a good time to invest in the following 5 companies. Here are a few option plays you may want to consider.

I write a weekly article to give options traders a weekly look at upcoming earnings releases by companies who tend to get some very big moves after reporting and how I will trade them. For the most part, these strategies work great with technology and healthcare-related stocks because they tend to move a lot more on their earnings, but there are exceptions.

I recommended on October 6 to buy a strangle option strategy on Intuitive Surgical (ISRG), which turned out to be a real home run. I recommended buying the November 2011 $410 strike calls/$310 strike puts. This trade even exceeded my own expectations.

International Business Machines (IBM), VMware (VMW), Riverbed (RVBD), and EMC Corp (EMC) are other trade recommendations I made. I also cautioned those who planned to play only a bullish position in Apple (AAPL) on its earnings release that it was a risky move, even though I still love Apple going forward.

I plan to continue having this weekly list of stocks I feel are worth making a trade on. Looking ahead to next week (Oct. 24-28), this article will list some stocks that should provide very nice profits if played correctly. They are presented in chronological order of earnings reports

Monday, October 24, 2011

Netflix, Inc. (NFLX) is scheduled to report earnings after the market closes on Monday.

Netflix provides subscription-based Internet services for TV shows and movies in the United States and internationally. The company allows its subscribers to watch unlimited TV shows and movies streamed over the Internet to their televisions, computers, and mobile devices. Netflix is trading at $109.42 as of Wednesday’s market close.

52-week high: 304.79
52-week low: 103.13
EPS: 3.94
PE: 28.40
Div Rate: N/A
Yield: N/A
Market Cap: 5.75 B
Volume: 8.64 M

This is going to be a very important earnings release for Netflix. It’s the first since it increased the price for its DVD package plan a few months ago. Observers will closely be watching to see the number of subscribers they have lost due to this.

Netflix’s stock has plummeted since July 2011, as the chart above shows. You just don’t see a stock go from over $300/share to just above $100/share this quickly very often. Here is a look at what the stock did after reporting earnings last quarter, on July 25, 2011.


Jul 27, 2011 269.57 274.00 267.20 269.42 5,461,300
Jul 26, 2011 255.60 268.29 251.46 266.91 13,859,700
Jul 25, 2011 280.57 285.50 277.40 281.53 7,529,800

If you take the low high of $285.50 before reporting earnings on July 25, and the low of $251.46 on July 26, this would be a drop of 11.9%. That’s a big move for any stock.

One interesting side note about the last earnings on July 25th: The stock recovered a lot the next day on remarks by CEO Reed Hastings. This is often the case when Netflix’s stock is not doing well. This has happened with licensing deals with networks, abandoning the Qwikster disaster, and many other similar announcements. In other words, proceed with caution if you plan to take only one side of a trade here.

For my money, this is setting up as one of the best trades for the earnings season. However, I believe it would be foolish to just take one side of a trade here. As anyone who follows Netflix knows, this stock can pop north on even the slightest bit of good news.

Also to take into consideration is the large amount of short interest in Netflix — above 16%. The short ratio is 1.07. Again, if the loss of subscribers falls heavily from last quarter, but not as bad as expected, this could be viewed as a positive and send the stock up.

The trade that I’m very confident placing here is an options strangle, which is when a trader buys both call and put options that are out-of-the-money. I will have the expiration for the contracts at least one month out, so time value and the decrease in implied volatility doesn’t erode the price of my options. I do not recommend buying weekly options or very short-term options with this strategy.

Taking a look at Netflix’s option strike prices, I like the November 2011 $120 call strikes, along with the November 2011 $95.00 put strikes as the strangle trade.

There is going to be a huge move in this stock one way or another. This strategy aims to profit off of that. Of course, you can adjust the strike prices and expiration dates to your own personal preference.

See Seeking Alpha for the other four recommendations

Option Trading Secrets