Dressing an earnings trade in Hanesbrands

• Posted by Greg Harmon
• on April 23rd, 2015

Hanesbrands ($HBI) is known best for what you do not see. Underwear. Well, that is until Michael Jordan started pitching for them. The stock has had a very good run in 2015 thus far. Moving out of a base over December and January, it pushed higher to a short consolidation to start March. Leaving that consolidation mid month it rose to the current zone and has held since. The channel created between 33.30 and 34.65 is being tested at the top into the earnings report tonight after the close. A break higher would target a move to 40 with an interim target at 36.70 along the way.

As it sits in the channel the RSI has pulled back, held in the bullish zone and is rising again. The MACD has also pulled back but is curling up for what would be a bullish cross of the signal line. Also notice that the Bollinger Bands® had tightened in a squeeze, but are now opening. This gives room to the upside.

There is support lower at 33.30 and 31.65 with a gap to fill at 32.82 along the way. There is no resistance above today’s high at 34.77. The reaction to the last 6 earnings reports has been a move of about 5.93% on average or $2.05 making for an expected range of 32.65 to 36.75. The at-the money May Straddles suggest a larger $2.20 move by Expiry in three weeks with Implied Volatility at 31% above the June at 23%. Short interest is moderate at 3%.

Open interest is very large just above at the 45 Strike in May, with very active buying on the May 35 Call today. Strikes are $5 wide and show almost no activity or open interest at the next strike either way. This leaves just a few choices for trades.

Hanesbrands, $HBI

Trade Idea 1: Buy the May 35 Call for 95 cents.

Trade Idea 2: Buy the May 30/35 1×2 Call Spread for $3.10.

Trade Idea 3: Sell the May 35 Straddle for a $2.20 credit.

Trade Idea 4: Sell the May 35 Put for a $1.25 credit.

#1 gives the upside over 35, but with the large open interest there any move higher should be used to take profits. #2 also looks to the upside. it is a bit riskier with more capital out lay and a maximum payout on a pin at 35 in May. It makes money on a close over 33.10 and below 35 at May expiry. #3 looks for the large open interest at 35 to hold the stock close to that level at Expiry. It is profitable between 32.80 and 37.20 at May Expiry. #4 can be used as an entry at 33.75 or if it moves higher to collect and keep the premium. Trades #2, #3 and #4 use margin. I prefer #3 or #4.

This is typical of the earnings trades given to subscribers daily in the premium service. You can join for just $199 for 3 months, or $618 for a year and I’ll throw in a signed copy of my book.

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Dragonfly Capital Views Performance Through April 2015 Expiry.

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