Dell (DELL, $21.81, up $0.12) reported earnings last night and investors loved what they heard. The numbers came in four cents above expectations on strong international sales and from cutting costs and slashing its workforce. For the quarter, Dell earned $784 million, or $0.38 a share versus $756 million, or $0.34 a share, a year earlier. Revenue came in at a little over $16 billion, about $400 million above estimates. In after-hours trading Dell was up $2.16 to $23.97.

I profiled the June options and mentioned that option traders were favoring a good report. Let’s take a look at those options and see where they might open this morning and what kind of scenarios might play out.

If you were totally bullish on Dell and just bought the June 22 calls (DLQFV, $0.74, up $0.03) right before the close, your total cost would have been $75 a contract. If you bought 10 of them you are looking at $750. Now, assuming Dell opens at $24 and holds last night’s after-hour gains then the calls will be worth at least $2.00 and you more than doubled your money overnight. Your $750 is now worth $2,000. Good bet.

If you were totally bearish and you thought Dell was going to go down and you bought 10 June 20 puts (DLYRD, $0.22, down $0.04) then you are in “the house of pain” right now and you probably didn’t sleep too well last night. Your $225 is history. Not a good bet.

Now, what if you had bought 10 calls and 10 puts (known as a strangle option trade)? Your total cost would have been $1,000. The calls would still be worth $2.00 and you still would have made a 100% return even if the puts expire worthless. By “hedging” your Dell option trade you were protected either way unless the stock stayed flat. But I told you Dell could move 5-10% and last night’s 9.9% after the close was right on the money. Great bet.

However, as I also mention time-and-time again, after-hour trades do not mean realized profits. The stock and options actually have to open at 9:30 EST before you can book a gain or loss. Sometimes a 10% move in after-hour trading translates into a 5% gain or even a 5% loss in the stock price by the time the opening bell rings.

Hats off to Dell and to those option traders brave enough to play the earnings!

Rick Rouse
Rick@OptionsMentoring.com

Tags: Dell earnings strangle, hedge dell options

This entry was posted on Friday, May 30th, 2008 at 12:13 am and is filed under Earnings, Hot Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.