Here's my big earnings report play

Andy Swan created and co-founded DaytradeTeam five years ago on a principle of empowering individual stock and options traders with the techniques and analysis methods typically reserved for elite professionals. His expertise in technical analysis and commitment to educating members earned DaytradeTeam a top-ranking among advisory services for several years.

Each quarter I like to come up with the one earnings play that I think has the best chance to make a nice, quick profit. Of course, trading stocks into an earnings report is extremely risky and something I very rarely do, so please read this entire article before jumping in!

The big earnings play for tonight is Symantec Corporation (SYMC | Quote | Chart | News | PowerRating). There are a few compelling reasons why I believe SYMC could beat estimates AND raise guidance for future quarters, producing a sharp move higher in the stock:

• The technicals show strong support and a reversal! Look, earnings plays are educated guesses, so if I'm wrong, I want to have the technicals on my side to minimize the damage. SYMC does just that by starting a new uptrend channel and setting up great for an entry here near the support line of 16.75
  
  
  
• Competitors, customers and suppliers are performing well. Online security is coming back to the forefront, and SYMC is a leader.....although DELL's (DELL | Quote | Chart | News | PowerRating) warning last night is making me want to hedge my bet a little here.
  
• Analyst ratings have trended higher. Analysts rarely raise forecasts for the upcoming quarter without having good reason to do so....the only question is, has the market already priced in solid guidance?
  
  

* Note How Analysts have gotten more positive in the last month

So, how do I play this earnings report?

Obviously, the purest way to do this is to just buy the stock for an overnight gapper trade, expecting the earnings results to boost the stock higher. Unfortunately, this exposes you to large amounts of risk, because if SYMC disappoints, the stock could easily move 10% lower overnight. So I'm not going to put $25,000 into this quarter's earnings report...

A more effective way to play this earnings report is to buy OCT $17.5 call options (SYQJW) that are slightly out of the money. This has a twofold effect:

First, the longer time between now and the expiration date means that you will not lose much in the way of time-premium overnight (as those who buy the May or JUN options will) should the earnings report come in fairly neutral or even disappointing.

Secondly, with a delta of .54 on these calls, you can expect to see a significant increase in both the price of the option and the speed at which that price is accelerating should SYMC beat earnings expectations and the stock move higher as I expect. In other words, you keep your risk in check and allow yourself to maximize profits if correct....which pretty much sums up my entire trading philosophy!

I will likely grab six or seven contracts of these call options later today ahead of the report for a total investment of just under $1,000 (like I said, I don't like to risk a lot on an earnings play!) If things go poorly, I'll probably end up taking a $350 or so loss. On the other hand, if things go as well for SYMC as I expect tonight, I could easily double my money on the position overnight.

The Bottom Line

I think SYMC is going to do very well tonight, so I'm going to take a small position in some options that limit my risk if I'm wrong....but give me an opportunity to make a really nice score off of the trade if I'm right.

I hope that this earnings play gives you some insight into the approach that I take to trading. So many traders think only in terms of up or down, and miss the larger picture of reducing risk and maximizing profits.

Andy Swan
co-founder, DaytradeTeam