Friday, June 08, 2007

A Losing Trade - The Cooper Companies Inc. (COO)

Dear fellow stock options traders :


Understand that The Cooper Companies Inc. (COO) would be reporting earnings on 5 June 2007 after market close.

I've bought a ATM June 55 Call for $210.00 on 4 June 2007 when COO share price was hovering around $55.80 due to the following findings :-

1) I've researched that COO share price has gone up about $5.00 between 15 May 2007 to 21 May 2007 due to rumor of possibly being acquired. On 16 May 2007, Bausch & Lomb Inc. (BOL), a company belonging to the same industry, was acquired by a private equity .

2) At the same time, I've checked that companies like Align Technology Inc. (ALGN) and Patterson Companies Inc. (PDCO), which also belonged to the same industry (Medical/Dental-Supplies), have gapped up in their recent earnings announcement thus I felt COO might follow suit too.

However, I've made the following mistakes :-

1) I've bought the June 55 Call too early, about 2 days earlier to be exact. By 5 June 2007, COO has dropped more than -$1.50 to close at $54.10. I saw my call option premium shed to about $140 from my initial purchase price of $210 per contract. Lesson learned : Do not buy the option too early. At least wait till the eve of earnings announcement day to buy.

2) Since the share price of COO had started to weaken 2 days towards the earnings announcement day, that should have hinted me it was risky to hold on to the call option. A look at the past gapping history of COO revealed that on 12 Dec 2006 (eve of earnings), COO ever gapped down followed by forming an intra-day -$1.50 red candle. On 13 Dec 2006, COO plunged -$6.00 to $43.10 after earnings announcement. Lesson learned : study the chart movement carefully before buying the stock option contract.

On 5 June 207, COO reported 2nd Quarter (Apr) non-GAAP earnings of $0.48, comparable to the Reuters Estimates. Revenues rose 6.7% year/year to $225.5 mln vs the $227.7 mln consensus. The company also issued in-line guidance for FY07, expecting FY07 revenue of $927-967 mln vs. $929.14 mln consensus; the company also reaffirmed FY07 EPS guidance of $2.90-3.05.

On 5 June 2007, the market did not react favorably to COO's earnings results and COO promptly gapped down -$3.70 to open at $51.84. I looked at the Level 2 Code, price and volume and realized that the buying side was still strong. So I held on to my losing call option position and sold my contract around 3.55pm EST when it could still fetch back $80 and COO's price was $54.10.

Options premium would usually drop dramatically after earnings announcement due to the collapse of implied volatility. The option would only gain value if there's a substantial gap/down in the share price in the anticipated direction after earnings announcement.


Related Trade in my Stock Options Trading Blog

A Losing Trade on Mastercard Incorporated (MA) - 10 Feb 2007

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.

Wishing you Profitable in your Options Trading too.

Yours Sincerely,

Tony Chai
http://www.myoptionsonline.com

4 comments:

Anonymous said...

Your rule on waiting to buy right before earnings is a bad rule. Don't do it. If you're going to buy an option before earnings you should probably get in early as a rule. The reason for this is because the implied volatility of the option is usually jacked up right before the announcement. If you buy early and the value of the call increases due to the rise in implied volatility before earnings, you'll probably trim your losses should the move go against you.

Later,

95omega

Tony Chai said...

Hi :

Thanks for your comments.

If you buy an options a few days too early before earnings, the premium would lose money if the share price keeps going against the option you bought.

Your comment about implied volatility (IV) is very true. That's why in my earnings gapping analysis technique I must be very careful in searching a stock which has past gapping history of at least > $2.00 after earnings so that I can cover the IV I paid for.

It's good to receive a comment from someone who knows the risks involve. I would usually weigh the potential rewards before deciding whether to enter the position.

Thanks, buddy.

Tony Chai

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sharetipsinfo said...

Hi
Your blog is quite nice and informative.
As far as stock market is concerned. Trading in market requires
both time and Knowledge. Without these two factors its impossible to trade .
If you get recommendations from some specialist then also you must keep in mind its your money you
should invest it wisely. Its always advisable to get recommendations from analyst but again before investing you should do your research also.
Indian stock market is very high already now wait for dips before going long in Nifty or in some script.

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