ADTRAN Earnings Trade with Options

ADTRAN (ticker: $ADTN) reports earnings on Wednesday before the open. This is an interesting stock as it has been in a down trending channel on the daily chart since the beginning of March, but broke the channel higher last week, only to be back retesting the break out. Look at the daily chart below.

ADTRAN, $ADTN Daily

The Relative Strength Index (RSI) on this timeframe is pointing to more downside and at the same time the Moving Average Convergence Divergence (MACD) indicator has peaked and starting to decrease. If it breaks through the channel support then it has support lower at all the round numbers: 40, 39, 38 and 37. Below that it has the lower rail of the channel as support. Earnings can be a catalyst for change so it is also worth noting that there is resistance from three previous highs between 42.50 and 43. The weekly chart below paints a bit of a different picture though. This timeframe shows it

ADTRAN, $ADTN Weekly

in an uptrend since November 2008, currently testing the top of a textbook bull flag, with declining volume. The RSI on this timeframe has been trending higher but with a kink back now, and the MACD is improving. Also note that it has bounced off of the rising 50 week Simple Moving Average (SMA) on this latest move higher. Finally notice that the Andrew’s Pitchfork shows a recent move towards the Median Line, although it appears midway between the Median Line and the Lower Media Line currently and could be drawn either way. Positive in the longer term and bearish in the short term, but with a catalyst Wednesday. One way to play this is using calendar spreads. Below is the closing deck for July and August Options for ADTRAN. Using the resistance from the daily chart and the bullish bias

from the weekly chart you can put on a calendar spread ahead of earnings by buying the August 43 Strike Call for 1.05 and selling the July 43 Strike Call for 30 cents or a debit of 75 cents. This is a bet that it will not exceed 43 by Friday but that over the next month the bullish bias will play out. in fact the July options, using a combination of the 40 and 41 strike Puts and Calls suggest a move of about $2.55 by Friday or 6.3%. If it did this to the upside the price would reach 43.20 and you would have to buy back the short July Call for 20 cents, but the long August Call will have appreciated as well. But there is a way to reduce the cost of this trade by selling the July 38 Strike Put for 30c, making a net debit of 45c. This short Put is below all but one of the support points and just below the anticipated 6.3% move if it were to go fully to the down side.

Trade Summary: Buy 1 August 43 Strike Call and sell 1 July 43 Strike Call and 1 July 38 Strike Put for a net debit of 45c.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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