Polo Ralph Lauren Trade with Earnings Catalyst

• Posted by Greg Harmon
• on February 7th, 2012

Polo Ralph Lauren, $RL, reports earnings Wednesday morning before the open. Earnings can create a catalyst that moves the stock which is a double edged sword. Using technical analysis on the weekly chart below there has been rising trend support since the beginning of 2011. Since August, the 40 week Simple Moving Average (SMA) has provided support as well along that line with a last touch at around 139 and directly below now at 141. On the upside there is resistance near 163 from the October high and then free space above.

Polo Ralph Lauren, $RL

As it approaches the top it has a Relative Strength Index (RSI) that is bullish and rising and a Moving Average Convergence Divergence (MACD) indicator that has crossed positive. Both support a push higher. The chart is biased higher. The reaction to the last 6 earnings reports has been a move of about 7.7% on average or $12.00 at today’s price for a range of 145 to 169. The at-the money Straddles suggest that there will be a similar move of $11.35 by February Expiry and $14.70 by March Expiry. Implied volatility at 52% in February is high compared to the historical at 29%, and March options at 38%.

Trade Idea 1: Buy the February 165 Calls for $2.35.
A straight upside play risking only the premium paid.

Trade Idea 2: Buy the February 165/170 Call Spreads for $1.30.
A lower cost upside play with a reward to risk ratio of 3.84:1.

Trade Idea 3: Sell the February 140 Puts for $1.00.
A straight upside play receiving premium and exposure to buying the stock if it closes under 140 at Expiry.

Trade Idea 4: Buy the February 165/170 Call Spreads Selling the 140 Put for 30 cents
A leveraged upside play with a reward to risk ratio of 16.67:1 and exposure to owning the stock at 140 on February Expiry.

Trade Idea 5: Buy the March 165/170 Call Spreads Selling the 140 Put for a 45 cent credit.
Moving the structure from trade 4 out an additional 4 weeks and collecting premium in the process.

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