Wednesday, January 10, 2007

First Winning Trade in 2007 - HELE

Dear fellow options traders :

4th quarter earning season kick-started this week.

On 8 Jan 2007, I bought an at-the-money Jan 25 Put option of Helen Of Troy Ltd (HELE) at $0.90 when the share was trading around $25. This company engages in the design, development, production, and distribution of a portfolio of brand-name consumer products. The company operates in two segments, Personal Care and Housewares.

From Motley Fool's analysis of HELE before earnings announcement, I realized that the 2nd quarter earnings reported on 5 Oct 2006 was considered "surprising", where HELE gapped up about $3.70 on that day. I took a look at the balance sheet and realized inventory level was high. From Nov 2006 to early Jan 2007, the share was trading in a tight range of between $23 and $25. I anticipated that the earnings announcement on 9 Jan 2007 to have some impact to the stock price based on previous gapping price movement from earnings announcement. I decided to buy the put option also because premium wasn't inflated much by implied volatility.

On 9 Jan 2007, Helen of Troy (HELE) reported that fiscal 3rd quarter earnings rose to $22.8 million, or EPS of 72 cents a share, from $22.7 million, or 72 cents a share, a year earlier. Revenue increased to $213.4 million from last year's $197.5 million. Analysts surveyed by Thomson First Call were expecting EPS of 85 cents a share (EPS had missed by $0.13) and revenue of $204.6 million. Earnings were hurt by gross margin pressure in its personal care and housewares businesses, as well as by expenses associated with the OXO warehouse transition. For the fiscal 4th quarter, the company expected earnings of 25 to 30 cents a share, vs. analyst forecasts of 36 cents a share.

On 9 Jan 2007 (Tuesday), HELE dropped -$2.44 to $22.25 around 8.31am EST. I Sold my Jan 25 Put for $2.70 around 9.53am EST when HELE was $22.21. By 11.10am, HELE reached $22.15 (-$2.54). The put option could fetch $2.75. After the earnings conference call started from 11.00am EST, HELE went up to $22.25 (-$2.44) around 11.20am EST.

The above trade was based on gapping analysis, one of the technique taught by Dr Clemen Chiang to trade equity options when I attended the Live Freely Options Trading Seminar Workshop (Singapore).

You can take a look at my review of the Live Freely! Seminar HERE.

If you've managed to find out more about the Live Freely! Seminar from this blog and subsequently sign up for it, I hope you could do me a kind favour and mention Mr Tony Chai from Batch 14 as the referrer. Thank you for your kindness.

Currently, I'm still working hard to achieve profitable trades consistently.

Wishing you Profitable Trades in 2007.

Yours Sincerely,

Tony Chai