I discussed the big run up in Genworth Financial(GNW) over the past few weeks in a previous post on Optionshoney.com. The broader stock market indexes are all in slightly negative territory this afternoon as gold and silver continue to march higher!!! What is the play on GNW into earnings next week!? I am personally sticking with my bullish call on GNW and want to have long exposure going into earnings next week.
What is the Options play?
Options Trade#1: I would think about buying the GNW March 17, 2012 7 and 8 strike Call Options. Gnw shares are trading down around 4% today and I would be a buyer of these options at 1.08 and .50 cents a contract. I can purchase 10 contracts for a $1.08 ($1.08 x 100 shares per contract x 10 contracts=$1,080) and 20 contracts for .50 cents (.50 x 100 shares per contract x 20 contracts=$1,000) for a total cost of $2,080 plus trading fees. For a few thousand dollars, I will get long exposure to 3000 shares of GNW going into earnings next week. That is called leverage with purchasing Call Options. Buying 3000 shares of GNW stock today would cost me close to $23,100. If they beat the street and give any positive signals about a rapid decline in mortgage defaults or a housing recovery, this trade will be very profitable. If they miss and the stock tanks, I could lose a total of $2,080 plus fees on this trade. Remember options are very risky and extremely volatile. Please remember to consult your investment advisor before making any stock or options purchases.
Options Trade#2: I would also be a seller of the Feb 18, 2012 7 strike Put Options for .30 cents a contract. If I sell 20 contracts I will credit $600 to my brokerage account. Worst case scenario, I get exercised on the shares and I have to purchase 2000 shares of GNW at $7 for $14,000 plus fees. By selling the Put Options I will reduce the cost of buying the 2000 shares by the $600 credit to my brokerage account. Best case scenario, they blow out earnings next week and I keep the $600 without having to buy the shares…However, my long term outlook and price target on the stock is 17, so I like owning the stock at these levels. The book value of GNW shares is close to $28 a share…Good luck Longs!! Till next time on Optionshoney.com.
5 Year Chart on GNW courtesy of Fidelity Investments:
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Let us know what you think!