With earnings season already underway, traders are starting to get a feel of how well companies fared over the first few months of 2019. Despite anxiety over whether this season’s revenue numbers would fall short of previous quarters, upbeat reports from Dow components Johnson & Johnson JNJ and JP Morgan Chase & Co. JPM have kept major averages largely buoyant in the initial weeks of the season.
Earnings season is a time when many active traders utilize options strategies, as the large potential overnight volatility presents a good opportunity for short-term trades on both sides of the market. The table below shows the breakdown of the amount of bullish and bearish options trades on investment research platform, Quantamize, over the first two weeks of the Q1 earnings season.
Image courtesy of Quantamize
As we approach the heart of earnings season, here are three of the top options ideas currently highlighted by the platform.
Bullish - Best Buy Co. Inc. BBY Short Put Spread
Estimated to report at the end of May, this strategy suggests selling a $70 put in Best Buy while simultaneously buying a $66 put, with the same expiration date of May 25. Ideally, the stock will remain above the strike price of either put and both will expire worthless, netting the trader the premium paid for the put sold less the premium of the purchased put.
This strategy has a potential maximum per-share profit of $0.80 should Best Buy’s price remain above the $70 strike price of the sold put less the premium of the $66 purchased put, which is used to mitigate downside risk.
Image courtesy of Quantamize
Currently trading at around $73, Best Buy has delivered positive earnings surprises along both its top and bottom line over its previous five quarters. What’s more, Best Buy is a top buy-rated U.S. Consumer Discretionary stock according to Quantamize’s Q-Factor stock ranking model.
Bearish - VMware Inc VMW Put Spread Collar
VMware is trading near all-time highs around $190, and earnings are anticipated for May 30. This strategy is for traders anticipating the software company will dip back below the $190 level it reached at the start of April.
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The put collar spread entails buying a $190 put and selling a $180 put while simultaneously selling a $200 call and buying a $205 call. The maximum profit scenario occurs if VMware falls below $180 before the May 31 expiry, with break-even at $187.50. This will net the options trader the premium on the sold put and call options as well as the difference between the $190 and $180 puts less the premium paid on the purchased call and put contracts.
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This is a medium-risk strategy with a potential max loss of $7.50 per contract. Although the stock is nearing a low point in its 30-day implied volatility, VMware was below $180 as recently as the end of March. Though not necessarily an indicator on price reaction, VMware has exceeded analyst estimates in every quarter since 2012.
Yield-enhancing - Toll Brothers Inc. TOL Iron Condor
Tentatively set to report May 25, homebuilder, Toll Brothers, is a relatively low-beta stock currently at a 2019 high of $38.
This is among the reasons why it is well suited for a yield-enhancement strategy like the iron condor, an options strategy that delivers maximum profits when the underlying stock remains stable until expiration. In this instance, the strategy calls for a trader to sell a put at a $36 strike and buy a put at a $33 strike, while also selling a $39 call and buying a $42 call, all with an expiration of May 17, prior to earnings expected at the end of May.
Image courtesy of Quantamize
This iron condor strategy delivers a maximum profit of about $0.90 per share if the stock remains between the sold put and the sold call. In that instance, the options trader will profit from the premium paid on both of those contracts less the cost of the call and put purchased.
The three ideas above are among the top ideas picked up by the artificial intelligence-based algorithms on Quantamize. While you should do your own due diligence before making a trade, hopefully these can give you an idea or two for the coming weeks.
Quantamize is a content partner of Benzinga
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