Tuesday, November 13, 2007

A Trade on Polo Ralph Lauren Corp's (RL)

Dear Fellow Options Traders :

Noted that Polo Ralph Lauren Corp (Ticker : RL), a designer & manufacturer of lifestyle products like apparel and accessories, would be reporting on 7 Nov 2007 before market opens.

Polo Ralph Lauren Corp's (RL) stock price has been beaten down quite badly. As of 5 Nov 2007, RL has reached a new 52-Week low of $66.00. For the past 3 quarters, RL had also gapped down after earnings announcement either from missing EPS estimate (Q1/08) or had provided downside guidance during Q4/07 & Q3/07 earnings announcement.

From past earnings, I observed RL have a price gapping range (in either direction) of around $3.00 to $4.00 after earnings announcement. I paper traded a slightly in-the-money Nov 65 Call on the eve of earnings announcement ie. 6 Nov 2007 when RL was trading around $66.00. From past experiences, I have found that trading a call option for earnings announcement of a company which has already reached 52-Week low would yield a hgher probability of success (BUT not always the case though).

On 7 Nov 2007 (Wednesday) before market opens, RL reported Q2 (Sep) earnings of $1.09 per share, comparable to Reuters Estimates consensus. Revenues rose 11.3% year/year to $1.3 bln vs the $1.27 bln consensus. However, RL projected Q3 revenues to grow at a mid single digit percentage range. Polo Ralph Lauren Corp's (RL) also issued guidance for FY08; expected EPS of $3.50-3.60, might not be comparable to $3.70 consensus; expected Y08 revenues to increase by a low-teen percentage.

On 7/11/07 (Wednesday), RL gapped down -$1.60 initially to $64.73 when market opened. But the stock price started to move up gradually with good volume so I started to chart resistance lines as the price went up, reminding myself to sell the position once the stock price crossed the latest resistance line (please refer to following diagram). I sold the position at around 10.10am EST when the red candle cut the highest resistance line coupled with heavy selling (represented by the red volume bar at the bottom of the chart).

Yours Truly,

Tony Chai
Options Trading Resources