One new name for an earnings trade and a markets update

The markets are trading down today as the day wears on, and it’s S’s over Ns, meaning in this case that the tech-heavy Nasdaq is down more than the broader S&P sampling. Regardless, we’ve got Riverbed up more than 10% today after its shiny, happy report.  As I’d noted the last few weeks, anything other than a disastrous report was indeed priced in.   Back in late August and again about a month ago when the stock had a bad habit of dropping down near $20 a share, I’d been a buyer of Riverbed calls.  Those have lost some of their time-value, but after today’s big pop taking Riverbed back above $25 a share, all of those calls are now nicely profitable.  I’m holding them steady and will look to scale out of some of them if the stock can run another couple bucks or so.

Sandisk is tonight and while I think it’ll be a good report, the stock has already moved up from the $30s where we were buying calls in it repeatedly, to the high $40s now and that’s got me avoiding trying to game the reaction to the report tonight.   It’s already one of my biggest positions and we were rewarded for buying it during the “Greece-is-in-trouble-crash-of-summer-2011” that I’m not considering making a bet before its earnings tonight.

I did make one purchase this morning, something I’d hinted on in yesterday’s chat session — I bought a few out-of-the-money Netflix calls dated out into January of next year.  I don’t plan on holding the Netflix calls that long, but I do think that, like Riverbed, anything other than a disastrous report is likely already priced into Netflix right now.  By using calls that are out of the money and dated out into next year, I’m taking a big risk and if the stock goes down after its report, I’ll likely lose probably 1/3 to 1/2 value of these calls.  But if the report is decent, I expect this stock could pop 10% or more in the days after the report and that would likely result in catching a double or a triple in these calls.  The risk is huge. But so is the potential reward.

As I keep reminding you guys though, do NOT bet more than you can afford to lose on these types of short-term catalyst trading ideas — the trade in which you think you’ve got it all figured out, will be the one that goes against you.  So don’t kid yourself that you can game this stuff successfully on any individual trade like this — it’s all about getting more right than wrong over a whole bunch of these types of trades over a long period of time.  And making sure you’re betting so that you get paid when you are right.