Earnings trade breakdown for Generac

Earnings are coming up (Feb 11 I believe) for $GNRC and the expectations are really high. Given the obvious rush to buy generators after Hurricane Sandy, the most recent quarter earnings should be very good.

So let’s see what the market thinks by taking a look at the Daily chart:

GNRCThere are several perspectives that a trader can have here:

1) Cup forming, small flag here the past 8 days prepping for a B/O

2) Gap Fill below is certainly a potential scenario but seems so unlikely given this expected quarter performance

3) A very positive reaction could send this to test the most recent highs of 39.18

4) Earnings could be priced in, price just gyrates around

If long, and you just want to hold stock through earnings, then consider owning a February 40/35 Collar. This will cost you, but I will lay out a few post-earnings scenarios to help alleviate some of this initial cost:

  • Sell the February 40 Call (bid/ask of $.40/$.45)
  • Buy equal # of February 35 Put (bid/ask of $1.7/1.8)
  • Net cost of $1.3-$1.4 for this
  • Gain capped at the $40 strike (less, when you factor in initial cost, could improve if held to expiration)
  • Protection on any move under $35

So let’s take a look at a few different ways this can play out:

Stock pops to test $39 and stalls. You can:

1) Close the trade

2) Buy back the short Feb Call

3) Do nothing and ride it to expiration in hopes of a 40 Pin, keep a lot of the premium collected. Likely several opportunities to adjust before expiration, flexibility a key here.

Stock falls into Gap Fill area, say a 3% pullback:

1) Sell the Put for as much value as you can

2) Buy back short Call if under a dime

3) Play for a bounce to initiate a Collar again if appropriate

4) Do nothing, let it ride

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