Options Trading: 2 Useful Earnings Plays

Posted On January 23, 2018 1:27 pm

I have two options trading plays for you today. A bullish trade in Capital One (COF) and and bearish in Cree (CREE). We’ll be using a basic vertical spread in each.

Capital One Financial (COF) is credit card issuer that operates as a bank holding company. Which means it actually issues the loans and profits from collecting fees and interest payments.  This is in contrast to Visa and Mastercard which simply collect ‘swipe’ fees.

Based on JPM Morgan and  Wells Fargo’s earnings reports, which showed credit card and consumer lending as their strongest segments, it follows that COF will have similar strength.  Add in credit card balances at their highest levels in over a decade and rising interest rates means COF should keep the EPS growth trend in place and easily beat the top and bottom lines which are looking for 8% and 15% growth respectively.

Options Trading Action:

Let’s use a vertical spread:

-Buy to open 4 contracts COF Jan. (1/26) 103 Call

-Sell to open 4 contracts COF Jan. (1/26) 105 Call

For a Net Debit of $0.95 (do not go above $1.10)

Cree (CREE) manufactures LED lighting products that are sold to whose end market are mostly institutions such as school and hospitals. It also makes some low end chips for lighting in cars and some mobile devices.

For the most part, it makes commoditized products and doesn’t have pricing power. Its end markets are not growth areas. It is expected to break even on zero revenue growth. The chart looks ready for a breakdown.

Options Trading Action:

-Buy to open 3 contracts CREE Jan (1/26) 36 Puts

-Sell to open 3 contracts CREE Jan (1/26) 32.5 Puts

For a Net Debit of $1.35 (go as high  $1.45)

 Related: Learn How to Protect Your Investment Portfolio Here

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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