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Off-Season Earnings Specials

"I don't need a tornado to make the weather exciting."

-- Sonni Skye, TV meteorologist

Just because it isn't officially "earnings season," that doesn't mean companies don't continue to report quarterly results on a daily basis. And every once in a while, when people's eyes are focused on the distant horizon, we'll get a 70-day degree in January or an April squall. It catches everyone off-guard, captures headlines and provides the momentary thrill of an expected event.

With that theme in mind, I scanned for companies that will be reporting earnings sometime in the next few weeks and whose options are relatively inexpensive. The thinking is, if the options are not bracing for anything but the expected, anything out of the normal range could result in an exaggerated response. Again, think of 100 people running for cover on what was supposed to be a sunny day: In getting long options at a pre-event discount, we will be there to sell umbrellas (or sunscreen) at profit.

The very real downside is that nothing happens and we are left holding an inventory of an eroding asset. But remember, the capital requirement for buying options is significantly less and has the potential to deliver multiple greater returns than trading the underlying shares. The key is to be selective, limit your risk and understand that these are short-term speculative trades. Whether they work in our favor or not, one should look to exit the trades within a day or two of the earnings release.

Calm Before a Storm?

Quiksilver (ZQK) is slated to report second-quarter earnings on June 6. The company is expected to earn 27 cents per share, a modest 12% increase over the year-ago period.

The real key to this sea-and-surf apparel firm's report will be its guidance related to the integration of its March acquisition of France-based Rossignol, the well-known provider of skiing equipment and accessories. On its own, Quiksilver has been riding a wave of the cyclical resurgence of the beach/surf lifestyle, which seems to happen every third year, with the most recent same-store sales showing solid double-digit gains in May. If the company brings Rossignol into the fold and finds some of those magical synergies, it would provide a huge growth opportunity in terms of line of products and geographic distribution.

To be honest, some of the earnings and Rossignol excitement is currently reflected in the June options, which have an implied volatility (IV) in the low 40% range. This is a large premium above the 30-day historical average and slightly above the 36% six-month average. The stock price has reflected this optimism by gaining some 22% to $16.60 over the last 30 days. For this reason, I would look to buy the July options, which are sporting an IV in the 35% range.

One way to take advantage of this skew would be to establish a calendar spread. For example, sell the June $17.50 call for 40 cents and buy the July $17.50 call for 55 cents or a net debit of just 15 cents. The cost represents the maximum loss and the upside is unlimited. The best-case scenario is that the stock creeps higher, closing below $17.50 on June 17, rendering the short June options worthless and leaving the position net long the July $17.50 calls. How do you say cowabunga in French?
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