Saturday, April 07, 2007

A Winning Trade - Resources Connection Inc. (RECN)

Dear fellow options traders :

I bought a RECN April 35 Put contract for $185.00 each on 27 Mar 2007 when the stock was around $34.10. Resources Connection Inc. (RECN) is a professional services firm which partners with business leaders to solve problems, execute internal initiatives and transfer knowledge across all parts of a global enterprise via a web-based content management system.

The reason why I bought a put contract for RECN was mainly because a few weeks ago there were 2 companies (EXBD, FDS), which belonged to the same industry as RECN, also reported earnings but their share prices didn't respond well.

On 7 Feb 2007, Corporate Executive Board Co. (EXBD) gapped down -$11.42 to $84.00 after reporting its 4th quarter earnings. The Corporate Executive Board Company provides research, decision support tools, and executive education that focus on corporate strategy, operations, and general management issues.

On 20 March 2007, FactSet Research Systems Inc. (FDS), after reporting its earnings before the market opened, initially gapped up +$3.00 to $67.25. But the share dropped -$2.00 intra-day to close at $64.70. FDS also gave up more than $3.00 between 23 March 2007 to 26 March 2007, clearly reflecting some weakness of this industry. FactSet Research Systems, Inc. provides financial and economic information, and analytical applications to the investment community worldwide.

On 28 March after market closed, RECN reported 3rd Quarter GAAP earnings of $0.26 per share, including option expense and tax benefit, $0.01 worse than the Reuters Estimates consensus of $0.27; revenues rose 17.0% year/year to $187.5 mln vs the $185.7 mln consensus. On 29 March 2007, the share gapped down -$2.00 to $32.00 when market opened. I observed the Level 2 Code, price and volume action carefully before selling my April 35 Put around 10.00pm EST for $390.00 each making a profit of $205.00.

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


alex said...
This comment has been removed by a blog administrator.
Eric said...

Can you share step by step how you pick the stock?
1)12 steps funnel?
2)read the news?
3)check future event?


Tony Chai said...

Hi Eric :

The 12 steps funneling method is Freely Dynamic Strategy to select candidates for Credit Spreads.

As for my earnings gapping analysis methods, my most basic method would be to target on candidates which would have high probability f gapping up/down after earnings quarter after quarter.

One thing I discovered during this 2 years is to also focus on the strength of the industry of the companies reporting earnings.

To give you an example, in this current quarter, when restaurant operator BWLD gapped up after earnings, similar companies in the same industry also gapped up after earnings this quarter. Check out JBX, RRGB and you know what I mean. But be cautious this does not apply to every restaurant operator counters.

I'm still a student in this journey and still learning. Take care,

Tony Chai