Upcoming Earnings Equals Increased Option Premium

Luxury homebuilder Toll Brothers (TOL) reports earnings after today's market close. If you have been following the recommendations in this letter you sold put options on TOL on July 17 and were assigned 100 shares of stock for every put sold. Today we can earn more income with covered calls.

Remember the goal with trading for income is to earn steady, double-digit annual income by selling options first put option then covered calls. With our upside limited to about 2-4% based on the upfront premium paid you should have tight stop loss for downside protection. Every recommendation has a suggested stop loss which is usually a loss of less than 10% on the position cost basis (strike price - premium received).

Yesterday you had the opportunity to continue to earn double digit income on Home Depot (HD) before this mornings earnings report. Even though the stock rose higher than the $210 strike price that was recommended you are still a winner since earnings announcements are giant gambles which can send the stock dramatically in either direction. The covered call trade used this expected volatility to our advantage by selling a higher than normal premium call option against the shares we already owned. I personally chose not to gamble and am perfectly happy earning 2.2% upfront for about a month holding period. With HD shares higher this morning the trade is likely to be a winner and the stock will be called away on the option expiration date.

Toll Brothers has a similar setup today.

On July 17, you could have sold to open the August 16, $37 (known as the strike price) puts on Toll Brothers for about $1.13 a 3.1% payment for agreeing to buy shares at $37. Shares declined a bit and traded in the $35 to $36.50 range for a while and we were assigned shares of stock. The trade recommendations cost basis is $35.87 ($37 - $1.13). Today shares are trading around $36.50 so we are back in the profit zone.

With Toll Brothers set to announce earnings after today's market close, option prices have increased with the expected stock volatility. So it is a great time to earn more cash.

Trade details:

Sell to open the September 20, $37 covered calls on your Toll Brothers shares for around $1.10 or better using a limit order.

At expiration is shares are above $37: your shares will sell for $37. Total return for about 2 months will be 6.2% or 34.9% annualized.

At expiration is shares are below $37: keep your shares and the income you earned then look for more covered calls to sell for additional income.

Instead of gambling on earnings announcements use the extra volatility to your advantage to enhance your trading for income strategy.

Cheers to your health and wealth.

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.