Friday, November 02, 2007

A Losing Trade on CROCS Inc (CROX)

Dear Fellow Options Trader :

For the past 2 earnings quarters, CROCS Inc (CROX) was a stunning performer.

On 27 July 2007, CROX gapped up +$9.00 to $59.21 when they reported their Q2 earnings quarter where EPS was $0.14 better than the Reuters Estimates consensus and revenues rose 162.0% year/year to $224.3 mln.

On 4 May 2007, CROX gapped up +$12.00 to $69.00 when they reported Q1 earnings of $0.61 per share, $0.12 better than the Reuters Estimates consensus of $0.49; revenues rose 216.7% year/year to $142 mln. The company also announces 2-for-1 stock split.

I checked through the research analysts comments for the past 1 month or so and most were positive, expecting CROX to beat Q3 earnings with upside Q4 guidance anticipating a strong holiday season ahead. Besides, channel checks at the co's retail store also indicated sales to be exceptional.

After 2 blow-out earning quarters, expectation must be running high for CROX to perform exceptional well this quarter. as can be seen from the 9 points rise a few days before earnings announcement before the plunge on 1 Nov 2007.

CROX options are also expensive due to build-up of implied volatility leading to earnings announcement as you can see that the out-the-money Nov 75 Call still demand $6.10 per share.

Expecting CROCS Inc (CROX) to build on the momentum of the 2 previous blow-out earnings quarter, I paper traded a Nov 75 Call at $610.00 on the eve of earnings, 31 Oct 2007. After market closed, CROX reported Q3 earnings where EPS beat by a mere $0.03 while revenue was in-line. CROX raises FY07 guidance again but it was a mixed guidance as the company expect FY07 EPS to be $1.94-1.98 vs. $1.97 consensus while FY07 revenue to be $820-830 mln vs. $835.67 mln consensus. In the company conference call, CROX said they missed out on approx $10-15 mln this quarter due to delayed shipments.

On 1 Nov 2007 when market opened, CROX tanked -$20.00 to $53.60 and went down further -$6.00 to close at $47.74. The Nov 75 Call lost all its premium. It would now depend whether CROX would turn around these 2 weeks to fetch back at least some of the premium.

Yours Truly,

Tony Chai
Options Trading Resources