Michael Shulman, Expert Trader, Analyst and Educator

Michael Shulman, Expert Trader, Analyst and Educator

Macy’s (M) just blew up. What to do?

Let’s step back a bit…

How should you play earnings with calls?

Wait until the suckers (a.k.a. speculators) have placed their bets and own or lose on their trades. After the speculators have made or lost money, the volatility created by the earnings announcement—and its aftermath—lingers. And that means premiums remain high.

The Weekly CallMacy’s announced truly awful earnings this week. The stock blew up and put in a bottom around $30.

How do you play this volatility and short-term bottoming with a call?

If you buy the shares around $31.40, and sell this upcoming week’s $31.50 (yes, in the money call) you bring in about $60 in cash per contract.

If you get called out—and you do want to be called out—you net $0.60 per share or $60 per 100 shares.

Sound like too little? Do this 52 times a year, and you generate $31.20 in cash from a capital base of $31.40.

Oh yeah, that means a return on capital of 100% a year.

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