Saturday, December 22, 2007

A Trade on CarMax (KMX)

Dear fellow options traders :

Noted that CarMax (ticker : KMX), which operates as a retailer of used vehicles in the United States, would be reporting its Q3 earnings on 19 Dec 2007 before market opened.

From Feb 2007 till now, investors have experienced the market going up and down from the credit crunch due mainly to the subprime mortgage crisis. Over the past few months, we've also witnessed investment banks wrote-off billions of bad debts tied to subprime mortgages exposure which have, sadly, led to the resignation of a number of CEOs from a few investment banking companies. With the dark clouds of the credit crunch looming and inflation kept creeping up, in particular the price of crude oil, I felt that CarMax (KMX) might encounter a challenging 3rd quarter if consumers were unwilling in spend in such an economic environment.

Since CarMax also make loans to car buyers, I was also concerned that consumers might shun away from any types of loans due to the widespread default of mortgages.

I've read that in the Q2 earnings quarter conference, CarMax CEO reported that sales were slowing down but margins were on the rise!! This was a bit different from what he mentioned a few days ago in an investors' conference that CarMax intended to trade margins for market share. I was thus cautious how the margins-for-market share plan would be executed in the Q3 earnings quarter.

I've also read in an analyst report that industry-wide demand for new cars has been very weak all year. This would create a spill-over effect on demand for late-model used cars. Slow traffic continued to create headwinds for CarMax (KMX) retail sales as well as trade-in/appraisal offer volumes. Same-store sales in Q3 and probably in Q4 were projected to be negative.

With an understanding that CarMax (KMX) doesn't have a big gapping range after earnings, I bought a just in-the-money (ITM) Dec 22.50 Put option for $170.00 per contract on 18 Dec 2007 when KMX was trading around $21.50.

On 19 Dec 2007, CarMax (KMX) reported Q3 earnings of $0.14 per share, $0.03 worse than the consensus of $0.17; revenues rose 37.2% year/year to $1.89 Bln vs the $1.89 bln consensus. Co issued downside guidance for FY08, expecting EPS of $0.87-0.93 vs. $0.95 consensus, prior guidance $0.92-0.98. CarMax Auto Finance was being negatively affected by the unstable credit mkts, making it harder for the company to profitably fund its receivables through the asset-backed commercial paper market. In the near-term, the uncertainty in the credit markets as well as the challenging economic environment would continue to cloud the earnings outlook for CarMax.

The share price of KMX gapped down -$1.20 to $20.47 on 19 Dec 2007 when market opened. The share price attempted to move up during the conference call. Listening to the conference call while at the same time observing the chart pattern, trading volume and Level II code activity, I noticed the share price started to dip when the car loans were mentioned, I sold my options position for $230.00 when KMX touched $20.40.

You might want to take note that Mr Warren Buffet have bought shares of CarMax after last quarter's report. He might have seen value in the company and confident that the company would turn around when the economic conditions improve.

I would like to also take this special festive occasion to Wish You and Your Family a Very, Very Special Merry Christmas. I sincerely wish that You would have a Prosperous & Profitable Options Trading Year in 2008 (and beyond!!). Good Luck, Everyone : )

Yours Truly,

Tony Chai
Options Trading Resources

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Sunday, December 16, 2007

Companies reporting earnings this week (17 Dec to 21 Dec, 2007)

Dear Fellow Options Traders :

Do take note of the following companies reporting earnings this week (17 Dec to 21 Dec 2007) which have good gapping history, in the order of Company's Name, Ticker Symbol, Industry Sector :

17 Dec 2007 (Monday)

Adobe Systems Inc (ADBE) - Application Software, Technology = reporting AMC

18 Dec 2007 (Tuesday)

Best Buy Co. Inc (BBY) - Electronic Stores, Services = reporting BMO
Goldman Sachs Group Inc (GS) - Investment Brokerage, Financial = reporting BMO

19 Dec 2007 (Wednesday)

CarMax Inc (KMX) - Auto Dealership, Services = reporting BMO
Joy Global, Inc (JOYG) - Farm & Construction Machinery, Industrial Goods = reporting BMO

Healthways Inc (HWAY) - Specialized Health Services, Healthcare = reporting AMC
Nike Inc (NKE) - Apparel Footware & Accessories, Consumer Goods = reporting AMC

20 Dec 2007 (Thursday)

Bear Stearns Companies Inc (BSC) - Investment Brokerage, Financial = reporting BMO
FedEx Corporation (FDX) - Air Delivery & Freight Services = reporting BMO

Research In Motion Ltd (RIMM) - Diversified Communication Services, Technology = reporting AMC

BMO : Before Market Opens
AMC : After Market Close

Yours Truly,

Tony Chai
Options Trading Resources

Note : The above companies listed are for your reference only and not my stock recommendations. Please check back or the company official web-site for any changes to the earnings reporting dates.

Friday, December 07, 2007

Options 101: From Theory to Application

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Yours Truly,

Tony Chai
Options Trading Resources

Saturday, December 01, 2007

A Trade on (PCLN) - Q3/07 earnings

Dear Fellow Options Traders :

Noted that (PCLN), an online travel company that provides various travel services, including airline tickets, hotel rooms, car rentals, vacation packages etc, would be reporting Q3 earnings on 8 Nov 2007 after-market-close. (PCLN) price gapping characteristics for earnings announcement has been remarkable.

On 8 Aug 2007 when PCLN reported a knock-out Q2/07 earnings beating EPS (earnings per share) estimates by 21 cents, the stock price gapped up +$12.00 to $77.00 and went up +$2.00 intra-day to close at $79.00. Similarly, when PCLN reported Q4/06 on 12 Feb 2007 beating EPS estimate by 18 cents, on 13 Feb 2007 (Tuesday), PCLN already went up +$4.27 to $50.20 by 10.00am EST.

But on 9 May 2007 (Wednesday), (PCLN) did gap down -$2.00 to $62.00 and went down intra-day another -$4.00 to $58.00 when they reported Q1/07 earnings which was in-line with a upside pre-announcement made earlier.

With an understanding that (PCLN) has good gapping range after earnings announcement, I monitored PCLN development closely towards announcement day. From, I noted a number of target price upgrades by research analysts. On 8 Aug, PCLN announced the "Name Your Own Price" and "Published-Price hotel services". From what I've read, I was most confident of's robust growth in the European online travel market and felt that it should provide a positive impetus to their Q3/07 earnings.

Thus, I paper-traded a Nov 85 Call on 8 Nov 2007 for $540.00 per contract when PCLN was trading around $85.00. I understand that it was a little risky to buy a call when the market was rather bearish. In fact, the Dow Jones Index lost more than 350 points on 8 Nov 2007!! But on the other hand, if PCLN could report another stunning earings quarter, the stock price would move up tremendously either by institutions shifting their money into the better performer or from covering by the short-sellers.

On 8 Nov 2007, (PCLN) reported Q3 (Sep) earnings of $1.58 per share, excluding non-recurring items, $0.29 better than the Reuters Estimates consensus of $1.29; revenues rose 33.7% year/year to $416.9 mln vs the $386.6 mln consensus. The company also provided upside guidance for Q4 EPS of $0.77-0.85 vs. $0.77 consensus; ad expect Q4 revenues up 22-26% (roughly $317-328 mln) vs. $323.53 mln consensus.

It was another knock-out earnings for (PCLN). I expected PCLN to do well for its European market but in this quarter there was also a significant increase in domestic booking rates. On 9 Nov 2007, PCLN promptly gapped up +$14.00 to $98.00 and moved up another +$4.00 to close at $103.00.

I sold the Nov 85 Call at $1,140.00 for a profit of $570.00 (including commissions).

With (PCLN) having gapped up more than $10.00 in this recent earnings quarter, the time value of the options would definitely price in this amount of gapping range (ie. $10.00) for the next earnings quarter. So, be aware that options would be expensive if you intend to trade PCLN for the next quarter's earnings announcement. Also, if you observe high expectations building towards PCLN next earnings announcement and the share price keeps going up in the few days leading to earnings announcement, be careful that the stock might not perform phenomenally if the share price has moved up too much before earnings or PCLN did not report spectacularly in the next earnings quarter.

Yours Truly,

Tony Chai
Options Trading Resources