A Winning Trade - Lehman Brothers Holdings Inc (LEH)

Dear fellow options traders :


There were a few Investment Brokerage firms reporting earnings this week. These include Lehman Brothers Holdings Inc (LEH), Goldman Sachs Group Inc. (GS) & Bear Stearns Companies Inc (BSC). I've checked that the sub-prime mortgage jitteries were not over and some of the companies mentioned above had certain exposure to such risks, though the exposure were limited. On 16 Feb 2007, Banc of America's analysis reported an equity impact of roughly 9% on average for Bear Stearns (BSC) and Lehman Brothers (LEH), and 3% for the others.

Goldman Sachs Group Inc. (GS) would be reporting earnings on 13 March 2007 before market opened and Lehman Brothers (LEH) would be reporting subsequently on 14 March 2007. I had a feeling that if GS's stock price fell on 13 March 2007 because of bad earnings related to the sub-prime mortgage problems, LEH's price might also drop and I might not be able to fetch a good price for March 70 Put on 13 March 2007. Thus I bought a Lehman Brothers (LEH) March 70 Put for $30.00 on 12 March 2007 when the stock price was hovering around $75.00.

But Goldman Sachs Group Inc. (GS) reported good earnings on 13 March 2007 and gapped about +$2.00 to $204.96 when market opened. By 11.00am EST, GS reached +$4.30 to $206.92. However, another bad news broke out again from the sub-prime mortgage sector, this time it was from Accredited Home Lenders (LEND); and that sent the stock market spiraling down after mid-day. GS and LEH were both naturally hit, as GS closed down to $199.03 and LEH dropped to $72.00 on 13 March 2007.

On 14 March 2007 before market opened, Lehman Brothers (LEH) reported 1st quarter earnings of $1.96 per share, $0.01 better than the Reuters Estimates consensus of $1.95; revenues rose 11.3% year/year to $5.05 bln vs the $4.94 bln consensus. LEH initially gapped down -$1.00 to $71.00 when market opened. I monitored the Level 2 code, price & volume chart of LEH very intently when it opened for trading and realised that the stock price was slipping gradually minute after minute. I held my position until 10.04pm EST when LEH dropped to about $68.80 and I sold my put contract for $185.00, gaining a profit of $155.00.


If you've managed to find out about the Live Freely! Seminar from my stock options trading 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.

I'm still working towards achieving profitable trades consistently.

Wishing you Profitable in your Options Trading too.

Yours Sincerely,

Tony Chai
http://www.myoptionsonline.com