Opportunities In Earnings
The market was mixed again today, Slow to get moving. By the end of the day the Dow Jones was down, and the S&P and Nasdaq were up a little. As I said yesterday, I was hoping we would have a bit of a bounce back and we did. I was able to close the Snowflake (SNOW) and Nvidia (NVDA) puts I wrote but it did little else. There was just not enough movement to do much else. And given that I had written so many contracts yesterday, I had to hold back and not write too much. Again, I worry about how high the market has gotten lately - we are due a pullback.
Since there was not a lot going on in terms of economic news, no stock specific gossip to play on, I looked at the earnings calendar put out by the Nasdaq (www.nasdaq.com/market-activity/earnings). Earnings season, the couple weeks when companies report their quarterly results, is almost over so there was not a lot to play with here either. Two companies that would be reporting after the close today caught my eye: Salesforce (CRM) and Marvel (MRVL).
I was called out of my CRM position on November 18th at a loss. As a result, I can’t write a put without potentially triggering a wash sale violation which would erase the CRM tax loss I need to help offset this year’s gains. A wash sale is a trade in which an investor sells a security at a loss and then repurchases the same or a substantially identical security within 30 days before or after the sale. A put option is like purchasing the share so the IRS explicitly includes options in wash sale rules. This is a pity because I was pretty sure CRM would have a good quarter. The CEO was going to be on CNBC’s Mad Money tonight and CEOs generally prefer to go on when earnings are good. Plus, they had a couple rocky quarters recently and it seemed it was likely this would be a rebound quarter. I like to sell put options on stocks I think will have good earnings. The sudden jump up the following day can be very profitable.
MRVL however is different story. It is a stock on my shopping list. It is a smaller semiconductor company which trades much cheaper than the larger players in the market and given the positive results of many peers this quarter, I anticipate it might do well. It trades at $95 a share; I had to go out to September of 2025 to find a premium above $10. I sold a put contract for a $90 dollar strike in Sept of 2025 for $11 per share. If I get put, I will own MRVL at $79 a share - more than 20% below where it is currently trading. This is a typical contract for me as I almost always set put contracts at levels that are 20% below current trading levels.
I doubt, however, that I will hold onto this MRVL put contract that long. I hope to close it tomorrow. If the company reports bad numbers, I may get stuck holding onto this contract for a while. Mind you, I would be happy to own MRVL at $79 per share. Generally, I do not go out that far into the future (I generally write contracts 3 to 4 months out). I needed to go out that far to get the $11 premium (the longer you go out in terms of time, the higher the option premiums). I wanted a premium of over $11 because if earnings are strong, and the stock price jumps, future premiums drop steeply as the likelihood that the company’s share price reaches the put strike price lessens.
In my experience, a jump in the share price of 5% or more based on strong earnings drops future option premiums over 50%. So given I sold a put on MRVL for a premium of 11 dollars, I stand to make unto $5.50 a share tomorrow on good earnings from MRVL. I have made less, and made more, so I like these types of earnings trades a lot. I think the odds are in my favor.
Follow-up: Happily, MRVL reported strong earnings driven by AI-related demand. The company reported better-than-expected revenue and provided an optimistic forecast for future growth in its AI segment, which is becoming a key revenue driver. There is broad market enthusiasm for companies investing in AI and related infrastructure. The stock popped over 10% after hours. Now I have something to look forward to tomorrow morning. Furthermore, CRM reported strong earnings and so did other companies reporting after hours so the pre-market looks strong. I may get out of a lot of the puts I wrote on Monday. I hope to get my $5 a share on MRVL. It is nice to have something to look forward to at market open tomorrow.
As a rule, I close strong gains on an earnings pop like this almost immediately after market opens. Enthusiasm can wane throughout the day and the stock price falls back and the premiums rise back up. I am a bird in hand girl. I have kicked myself on many occasions as the stock has raced higher throughout the day, particularly if the market is up all day. Let’s see what tomorrow brings. (5.5)