Michael Shulman, Expert Trader, Analyst and Educator

Michael Shulman, Expert Trader, Analyst and Educator

We are in earnings season and that means our Mondays are Manic Mondays, a term made famous by the song of the same name, performed by the Bangles but—and this is most appropriate—written by Prince.

It also seems appropriate that we make what may seem not like a manic trade, but a manic trade around an upcoming earnings announcement, if you get my drift.

The only thing insane about the trade is NOT making it.

What might that be? Since there is no publicly held company named Purple Rain, how about a buy-write position on Facebook (FB)—the kind of buy/write we do all the time in my Six-Figure Portfolio Coaching Program during earnings season or around major events for the stocks we follow and trade.

The heart of the trade is capital preservation through the use of options. What, around an earnings announcement? Keep reading—I’m not talking about buying options and betting the house; I’m talking about buying shares and selling a deep-in-the-money call.

Here is what you would have done at 3:45 p.m. Eastern on Friday, or you can do this on Monday morning.

The Weekly CallBuy Facebook shares at $110.50 or so. Sell the April Week Five 102 call for $9.85.

Are you nuts!?

Hang on…

This brings your cost basis down to $100.64. And that means if the stock drops 10% due to a bad earnings announcement (the stock can gap up and down 10% or so around earnings; check the charts), you’re around breakeven.

And what do you make if the announcement doesn’t move the stock below 102 and you are called out?

Your cost basis is $100.65, you sell the shares for $102, you net $1.35. That translates into a return on capital of 1.22%.

You may say “so what?” But the way to evaluate this and any other trade is to calculate an annualized rate of return on the trade. And that means, for a week-long trade, you multiply that 1.22% gain by 52. That’s an annualized return of 63.5%.

The Weekly CallGot your attention now? Seriously, you MUST use this kind of calculation to evaluate the potential of option transactions that have different time periods until expiration.

This, too, is something I discuss all the time throughout the Six-Figure Portfolio Coaching Program, from Boot Camp until we are analyzing LEAP/call spreads.

Think about it.

In the immortal words of Prince, “Money won’t buy you happiness, but it’ll pay for the search.”

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