- The Kentucky Derby is often referred to as “the most exciting two minutes in sports.” Unfortunately, this fast-paced event only occurs once a year. Lucky for us, though, we can get a similar rush every day trading options.
Just like betting on the horses at the Derby, we place our bets on options in anticipation that they run far and fast enough to deliver profits by expiration.
So, in the spirit of the Derby, we are recommending eight short-term options trades that should deliver some fast profits.
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#1 Liz Claiborne (LIZ)
By Michael Shulman
Kentucky is known as the “home of fast horses and beautiful women” (good thing I didn’t get my adjectives confused). On Derby Day, this is especially true. Well, obviously the horses, but I’m talking about the women. Women’s fashion is a big part of the tradition, but women in general are spending more money on clothes. Not as much as they did in 2005, but a lot more than in 2008 and 2009. One beneficiary could be Liz Claiborne ().
LIZ is a terribly managed company, and in the past my subscribers were able to enjoy gains of 155%, 162%, 169% and 200% with put options on LIZ. But now it is time to look at call options. The company is on the mend and has a number of popular brands, and it may even be a takeover target.
With the company reporting earnings on May 13, I’d look at some short-term LIZ calls.
Get .
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#2 Barrick Gold Corp. (ABX)
By Sam Collins
At the Derby they’ll be running for the gold, but you could be a winner with gold even if the horse you’re betting on isn’t in the winner’s circle.
Barrick Gold Corp. () is an explorer and developer of gold, copper, silver and zinc. Longer-term investors buy ABX as an (Standard and Poor’s rates the stock a “four-star buy” with a 12-month target of $46). But traders will use it as a “flight to safety” in times of financial crisis. With such crises in several European countries, and the euro down, this may be the ideal time to buy calls in ABX for a quick trade.
With the stock now around $44, buy the ABX June 43 Calls () under $3 with a target of $6 by May 31.
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#3 Family Dollar Stores (FDO)
By Chris Johnson and Jon Lewis
Super Saver is a Derby contender with odds putting the horse in the middle of the pack. Speaking of super savings, Family Dollar Stores () is a deep-discount retailer that has provided steady performance and big returns. The stock is up more than 40% this year, and hasn’t closed a day below its rising 20-day since early January.
The company has handily beaten the past four earnings estimates, and has grown profits every quarter for the past two and a half years. That’s a feat few companies — in any industry — can match. Of course, it’s no secret that shoppers flocked to stores with lower prices throughout the economic downturn. But recent data shows that they’re not inclined to change their habits any time soon.
Despite FDO’s success on the charts, short interest remains relatively high, and fewer than half the covering analysts rate the stock a “buy.” Such skepticism tells us that the current rally is far from the home stretch.
Buy FDO June calls, which should give the stock plenty of time to surpass the all-time high reached in 2003.
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#4 ON Semiconductor (ONNN)
By Nick Atkeson and Andrew Houghton
ON Semiconductor () reports earnings on May 5. The stock has just retraced from $9 to $8. On next year’s earnings estimate, it is trading below a 10 p/e.
Earlier this month, we saw heavy institutional option buying more in the May calls. Clearly, investors believe earnings will be a positive catalyst for the stock and the options.
With the stock pullback, we are now able to buy the ONNN May 9 Calls (). This race should be fast and furious, and our long-shot bet could pay out big.
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#5 Diageo (DEO)
By Michael Shulman
The mint julep is the traditional (and very popular) beverage of the Kentucky Derby. But no matter how many mint juleps are consumed on Derby Day, it will not help Diageo (), a worldwide leader in spirits.
Diageo has a lot of exposure to Europe, and the debt crisis is now hitting expectations for consumer spending. And it ain’t just Europe. I recently attended the country’s largest single whisky tasting in New York. Single malts are at the beginning of what may be their best year ever, but specialty and mass market liquors, the heart of Diageo’s business in the United States, are not doing well.
Diageo is well-managed; the company and the stock are just in the wrong place at the wrong time. So take a look at some near-term DEO puts.
Learn
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#6 Southwest Airlines (LUV)
By Sam Collins
Southwest Airlines () is unusual in that while its peers lose money, Southwest actually makes money. There is another difference, too, and its stock symbol says it all: “LUV.” Passengers love flying with Southwest. In poll after poll, people chose it above other airlines. So, if you’re flying to Louisville, Ky., for the Derby, or anywhere else, you’ll probably choose Southwest.
Earnings for LUV are expected to improve, and have increased from 22 cents to an estimated 39 cents over the past five quarters. Ford Research says, “They have shown strong acceleration in quarterly growth rates when adjusted for the volatility of earnings. This indicates an improvement in future earnings growth may occur.”
The stock recently pulled back slightly following a new high on April 26, at $13.97, and is now close to $13.25. Buy the LUV June 13 Calls () for 90 cents or less with a target of $1.75 by May 31. I think you’ll just LUV this trade.
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#7 Buffalo Wild Wings (BWLD)
By Chris Johnson and Jon Lewis
Derby contender She Be Wild is a 50:1 shot. When we saw the name of the horse, I immediately thought of a “wild” stock that we recently added to our portfolio.
Restaurant stocks have been performing relatively well this year, as consumers haven’t lost their appetite for eating out. When it comes to casual dining, one restaurant is almost always on the list for us: Buffalo Wild Wings (). Whether you go to watch the game … or horse race … or you just enjoy eating chicken wings, BW3 fits the bill.
The company just announced earnings that beat expectations by a penny, along with a softer-than-expected outlook. The results cut the stock price by about 20% immediately after the report. Our indications are that the sell-off was well beyond reason and that this stock has better odds than She Be Wild to double your money over the short term.
Buy BWLD May calls as a leveraged position on the stock’s post-earnings recovery before it gets out of the gate.
Learn .
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#8 Maiden Holdings (MHLD)
By Nick Atkeson and Andrew Houghton
Since late last year, options investors have been betting that Maiden Holdings (), which offers reinsurance products and services to insurance companies in the United States and Europe, will run past the $7.50 mark. Just a few days ago, the stock was trading at $7.61.
We like the pedigree of MHLD and believe we will see some fast action. The race is coming down to the last lap as earnings are scheduled to be reported on May 4.
With the market pullback on fears of a European sovereign debt meltdown, we can place our bet on the MHLD May 7.50 Calls () for 25 cents.
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