by Travis Johnson, Stock Gumshoe | September 17, 2013 4:29 pm
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A poor company in a rising market will probably do well because a rising tide will bouy up even a leaky boat.
I don’t see this market rising indiscriminately any longer. This is the perfect time to pick shorts.
Tilson’s off to a good start on this one — horrible enrollment figures out today (well, horrible for the company, probably good for the pupils) and the stock is collapsing.
Travis, thanks for profiling LRN for us. I dug in deep a few weeks ago and decided to buy Oct 19 puts, giving the company just enough time to report earnings. I made 1350% when I closed my position yesterday.
Which made me think… why didn’t I snatch up a few hundred Oct 11 $30 contracts on say Oct 7, when they would have cost almost nothing? I could have walked away a millionaire.
I had forgotten my thesis. Here was a company almost guaranteed to deliver a negative surprise. Even if I had bought more Oct 19 puts, I would have been able to sell them at just a small loss if the surprise didn’t come through.
I’m interested in exploring this approach in the future: find companies with a strong probability of an earnings surprise and buy short-term puts or calls just before earnings come out. I’m trying to get signed up for Zack’s Whisper Trader service, since it is designed to alert readers of stocks with high probability of surprise, but it looks like they may have closed the door to new subscribers. I like the options approach because my downside risk for any trade is limited to the amount I pay for the options, but in the case of a positive surprise the upside will likely be a multiple of that. Take my LRN trade for instance: I also bought calls on XRTX and DDD. My LRN profits are more than 5X the total amount risked on all options combined.
If anyone plays earnings surprises I’d be interested in discussing this approach with you.
Scott