Saturday, October 20, 2007

A Trade on SanDisk Corp (SNDK)

Dear fellow options traders :

3rd quarter earnings quarter has started. I understand that SanDisk Corp (SNDK), a maker of NAND flash storage products, would be reporting earnings on 18 Oct 2007 after-market-close.

From Breifing.com, I've noticed that a number of research analysts were optimistic that SNDK would report a strong Q3 quarter with solid guidance for Q4. But there were concern that the market had already priced in large upsides for the Q3 earnings, and that NAND supply would exceed demand in Q4.

If you have been trading stock options based on earnings gapping for a while, you would realize that the stock price of company would usually gap up if the company reported good earnings with good upside guidance for next quarter's earnings per share (EPS) and revenue. I was a little wary about buying a call option for SNDK earnings because on the same day (ie. 18 Oct 2007) when SNDK would be reporting earnings, EBAY plunged over 2 points when they had reported good earnings with good upside earnings guidance for the next quarter.

By checking SNDK's past price gapping history after earnings, I realized that SNDK would gap an average $3.00 up or down after earnings. Thus, I decided to buy an ATM Oct 50 Put option on 18 Oct 2007 at $210.00 per contract when SNDK was trading around $50.30.

After market close, SNDK did report a great Q3 earnings quarter. The cmpany reported Q3 (Sep) earnings of $0.54 per share, excluding non-recurring items, $0.21 better than the Reuters Estimates consensus of $0.33; revenues rose 38.0% year/year to $1.04 bln vs the $0.93 bln consensus. The CEO also mentioned in the earnings conference call that demand in Q3 was exceptionally strong internationally.

But alas on 19 Oct 2007, SNDK still gapped down -$3.60 to $46.76 when market opened. As I understand that SNDK price gapping habit was about $3.00 after earnings and that price gap had already been achieved when market opened, I quickly sold my put option at $360.00 for a profit of $150.00 around 9.35am EST. SNDK went down -$7.60 intra-day to close at $42.71.



I understood that I would be rewarded with a bigger profit if I had hung on to my position. But I was quite satisfied with the profit that I've obtained and since my option would be expiring at the end of the day, I did not want to risk turning my position into a losing trade if SNDK reversed position and rallied during the day instead.

Yours Truly,

Tony Chai
Options Trading Resources

12 comments:

yon said...

hi, nice get to know your blog. I am Yon Suryadi, 55th intake of Freely business School.

Just one question, how can you very sure the price would gap down instead gap up? Was it because you study the gapping history? or any information will be provided from others sources?

thanks

Yon

Tony Chai said...

Hi Yon :

When you buy option based on earnings gapping analysis, you have a 50-50 chance of whether it would gap up or down after earnings.

I chose options candidates with past gapping history of at least > $2 and preferably the current stock price is near a particular strike price (ie. near ATM) as my potential play.

I don't trade options if the time value of the options premium is overly-inflated with a too highly expected price gapping movement after earnings. This is because the position would lose money if the stock didn't gap that much after earnings.

As for the choice of put or call option, I try to get a more balanced view of the fundamentals of the company's earnings expectation not only from Briefing.com but also from other financial web-sites like Yahoo Finance, MoneyCentral.com, Whispernumber.com etc.

I also subscribed to Investors' Business Daily Industry Group service to have an idea of the company's current performance in terms of its earnings, relative strength status, industry ranking, ROE etc.

Technically, I usually don't trade a put option if it has touched its 52-week support. But this does not automatically apply that I don't trade a call when the stock touches its 52 week high :)

I do sometimes look at the options trading volume and decide whether it could be a contrarian trade if I saw too many options volume congregated in a particular side (eg. more volume in the call options) of an option series.

Hope you are doing fine with your options trading.

Yours Truly,

Tony Chai
My Options Trading Blog

Anonymous said...

hi, I am just a newbie to options and I am still a student. But I attend the Clemen Chiang workshop before.

If I do not take the step 1 that you mention, can I straight go for Clemen seminar since I don't know anything about options? And is it possible to start play options with a small amount, eg. USD 2000? I am still saving money before plan to go for the seminar. And I also heard some bad news from some of the student. That make me feel not so confident to attend it.

Tony Chai said...

Dear Friend :

I would advise that you learn at least some basic knowledge about stock options trading before you attend the seminar.

Learn what are the major options greeks like delta, theta, vega and gamma. Learn how implied volatility affect options premium and how it determine your options trading strategies. You can visit this useful blog http://www.optionstradingbeginner.blogspot.com for some of these basic knowledge.

But the "Options University 101 Home Study Course" is more comprehensive, compiled by Mr Ron Ianieri, who was an Option Specialist and has developed Option Theory and Trading Course for US Floor Traders. You can check out my review of the Options University 101 Home study course at this link in my blog.

Take note that although learning the earnings gapping technique at the Freely Seminar could let you gain explosive profit over a short time, always remember that high rewards come with equally high risks. If the stock gapped in the opposite direction of the options that you've bought, your position would probably lose money.

Thus, the #1 Rule when you apply this technique is to designate only 5% of your capital in every trade.

From my own experiences, I highly recommend that you do paper trading for at least a few months to familiarize yourself with the technique. Study a few companies with gapping history of at least a few dollars after earnings. Learn the inside-out of these companies in terms of their earnings performance, whether their products/services are still in hot demand, relative strength of the company's share, current ranking in the particular industry etc. The more familiar you are with the company's background, the better you are in anticipating the share movement of the stock.

I hope you would find the above information helpful in the making of your decision.

Yours Truly,

Tony Chai
My Options Trading Blog

Eric said...

Hi Tony,

Thanks your advice but I still have doubt. Hope you don't mind to answer me since I can said I am zero knowledge in stock, options, etc.

I would like to know whether I can apply the knowledge gain in options to apply into local stock market such as SGX, KLSE? Have you trade in local market as well instead of US options. At least I can plan my future before work and hope can afford to have a house and a car.

Thanks

Eric

Tony Chai said...

Hi Eric :

The Freely Seminar is targeted specially towards the trading of US stock options. The technical & fundamentals research steps are meant for US stocks. I'm not sure whether they could be applied to the Singapore or Malaysia stock market because I have not tried them myself.

It's good that you do some planning & homework so as to benefit the most from any seminar that you intend to sign up later.

Good Luck,

Tony Chai
My Options Trading Blog

Ren said...

Hi, thanks for your comment at my blog. Coincidentally, I trade options as well besides forex, however, I have stopped my options trading for a while now as I just couldn't stay up that late. I will start my options trading probably next year after all things are settled. I particularly like gapping strategy and a longer term strategy (period of 3 mths) but sometimes, it's not easy to find the right stock. Needs lots of study and searching in the day to do that. I see that you are into affiliate marketing, this is one area that I am keen to pick up as well. Till then, all the best in your options trading and wish you every success! Cheers!

Online Options Trading said...

hi Mr. Tony

how do you know whether the time value of option premium is overly inflated or not ?

thanks

Tony Chai said...

Hi :

One way would be to check whether the implied volatility of an option has been spiked higher compared to the historical volatility prior to the event.

You can get this information at http://www.ivolatility.com. Just input the ticker symbol and look at the volatility chart.

Yours Truly,

Tony Chai
My Options Trading Blog

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