NEW MARKET NEUTRAL OPTION PLAYS

Hewlett-Packard Co - HPQ - close: 31.39 change: -1.22

Stop Loss: n/a
Target(s): TBD
Current Option Gain/Loss: + 0.0%
Time Frame: 1 to 2 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Friday could be full of fireworks for HPQ. The company is due to report earnings on Thursday, Aug. 18th after the closing bell. Analysts are expecting a profit of $1.09 a share but there are rumors that the new HP TouchPad computer is not selling. HPQ's first attempt to compete with Apple's (AAPL) iPad product has not been accepted by the consumer and sales are so low that major retailers are asking HPQ to take them back - at least that's what the rumors are suggesting. The problem with the earnings results tomorrow is that these missing sales may not show up. HPQ could report X amount of "channel" sales that they billed to the retailers so any returns may not be factored in yet. The key may be HPQ's guidance.

We are suggesting a straddle or a strangle play to take advantage of any post-earnings volatility. HPQ reports Thursday night so we want to launch these positions tomorrow and tomorrow only. You could open them Thursday morning. The newsletter will use Thursday's closing prices.

Early Target: I'm not setting a target tonight but if we should happen to see a gain of +40% or more on Friday morning then readers may want to choose an early exit.

I am suggesting September options since August options expire after Friday.

NOTE: The newsletter is using Thursday's closing prices for these options. If HPQ closes up or down by more than a $1.00 then we'll roll our option strikes up or down to match the stock's move on Thursday.

Option Straddle (buy a call and put at the same strike)

Buy the Sep. $31 call (HPQ1117I31) current ask $1.71
- and -
Buy the Sep. $31 put (HPQ1117U31) current ask $1.42

- or -

Option Strangle (buy an OTM call and OTM put)

Buy the Sep. $34 call (HPQ1117I34) current ask $0.50
- and -
Buy the Sep. $28 put (HPQ1117U28) current ask $0.56

Annotated Chart:

Entry on August 18 at $ xx.xx
Earnings Date 08/18/11 (confirmed)
Average Daily Volume = 21.4 million
Listed on August 17, 2011