- Posted by Jason Ayres on October 19, 2015 filed in Options Market
Teck Resources Ltd (TSE:TCK.B) is set to report earnings before the market opens on Thursday, October 22nd. This is according to the earnings calendar found on the TMX Money website. This great little resource can be found here.
Back on August 1st, Patrick Ceresna built a case for taking advantage of buying shares of TCK.B at what appeared to be a significant discount.
He outlined the following considerations:
- Though there has been a contraction of earnings, the company is currently still profitable
- The company pays a nice dividend, but with a 152% payout ratio (source: yahoo finance), implies that the dividend is at risk of being reduced or cut all together
- From its $20.58 February high, TCK.B has materially dropped, hitting a $8.77 low in July
In his article, he outlined a Covered Call strategy whereby the investor could buy the shares at their current price of $9.35 and sell a January 2018 call. With the shares now at $8.34, this is still an interesting opportunity and I encourage you to take a look at the article if you haven’t already.
With that said, I’ll be speaking at the World Money Show on behalf of the Montreal Exchange on Saturday, October 31st. Details and Registration HERE. My topic is on Canadian Weekly Options. Since there are are weekly option available on TCK.B, and with earnings set to be released this Thursday, I thought it would be interesting to look at 2 ways an investors might be able to participate.
Below is a snap shot of the weekly chart. Note the 2009 lows comparative to where the stock is trading presently. As the old saying goes “..a stock is never to low to go lower” (Reminiscences of a Stock Operator) but, that low reflects an important long term support and the shares have recently tested and bounced
TECK RESOURCES LTD
Buy the stock, Buy a put
For the investor that feels there is a possibility that TCK.B is going to move higher on earnings, shares could be purchased (as of Friday, October 16) at $8.34. The challenge, of course, is the risk associated with poor earnings. To hedge this, a short term put could be purchased with the specific goal of limiting and identifying the risk in holding the shares through the earnings report.
The $8.00 strike put expiring on October 23 was asking $0.33 per contract (as of Friday, October 16). An investor who purchases the the stock at $8.34 and purchases the put for $0.33 has limited their risk to a total of $0.67 or a maximum of 8%, regardless of how bad the report is. If the stock takes off to the upside, the break-even is the share price paid plus the put premium. In this case $8.67. If the stock sells off due to a bad report, the investor has until the close of trading on expiration Friday to decide whether to exercise their right to sell the stock at $8.00 or sell the put for its market value (ideally a profit) and continue to hold the shares with the expectation that the price will turn around.
Buy a Call
The purchase of a call option would offer the investor the same risk/reward profile as the previous strategy without having to put up the money to buy the shares. If an investor felt there was going to be a jump in the shares on earnings, the call option would allow for participation with a limited and identifiable risk exposure. The $8.00 call expiring on Friday, October 23 (the day after earnings) is asking $0.70. Th $0.70 premium represents the maximum risk to the investor if the shares drop in value. The break-even point on expiration is $8.70. If the shares are trading beyond that, the investor profits. The interesting thing about this approach is that the investor has two choices on the expiration date (day after the earnings). If the stock is trading above $8.00, they can exercise their right and take possession of the shares. They would become a shareholder and subsequently benefit from any further price increase as well dividend payouts. If a short term profit from a positive earnings report was all they were after, they could sell the call before the close on the expiration Friday and lock in the profits. If the shares are below $8.00, the call would expire worthless and the investor would lose their premium.
In both strategies, the investor is able to take advantage of an event driven opportunity without having to pay the time premium associated with a longer dated option. Both the protective put and the long call have 7 days of time value, versus 30 days of time value for the next expiration date available. This allows the investor to build a strategic position around the TCK.B earnings at a reduced price.