Setting Up a Winning Earnings Trade in AOL Inc. (AOL) Using Options

AOL Inc. (AOL) is a media and technology company with a worldwide audience. The company’s stock is currently trading around $43.80 in a 52 week range of $33.20-$49.86. The stock is ripping higher today with shares rallying by more than 11% on the session. AOL is rallying on the release of the company’s most recent quarterly earnings where AOL beat consensus estimates on both top and bottom lines.

Analysts were expecting earnings of $0.32 per share on revenues of $594.6 million. Earnings came at $0.34 per share on revenues of $625.1 million. Ahead of the release market makers were implying a move of $3.50 my today’s close, implying an upside target in AOL of $43.20. I used this target to set up an options trade in AOL.

My Trade: I bought the AOL May 8th Weekly 42.5-43.5 Call Spreads for $0.25
Risk: $25 per 1 lot
Reward: $75 per 1 lot
Breakeven: $42.75

This trade offered a 3-1 reward to risk ratio and with stock at current levels is working out very well. I sold half of my position for a double this morning and if stock remains at these levels I will net the maximum value of $1.00 for this spread at the close, quadrupling my money overnight. This is a great example of how using the measured move target to set up options spreads ahead of earnings is the best way to calculate targets. This spread expires today so no matter what happens I will be out of the trade after today.