Friday, December 26, 2008

Emotions Control in Trading

Dear fellow options traders :

Emotions control is an important aspect in trading that every trader has to master. 2 of the most common emotions that traders would have to face during trading would be - Fear & Greed.

When a trade is profitable, a trader might take profit too quickly in the fear of losing it. Another trader might be greedy for more profit but saw his or her trade reverse into a losing trade and then regret not taking some profit when available. Yet another trader might encounter a string of successful trades, become complacent & greedy and then bet a large portion of the trading capital into the next trade and promptly lose it all in one failed trade. It is also very common for many traders to hold on to a losing position, hoping (another type of trading emotions) that the stock price would reverse back into a profitable position but instead the stock price keeps plunging & eventually widen the trading losses. The trader would then feel numb of the escalating trading losses and won't even bother to resolve or learn from the trading mistakes.

So how do you handle such emotions so that you would become a better trader? 2 things that I would like to share which would help you would be (1) money management (2) trade management.

Simply put, money management is the strict allocation of a certain percentage of your trading capital for every trade. It's advisable to allocate not more than 5% of your total trading capital for every trade. This percentage of allocation could be adjusted lower if your trading capital is substantial or adjusted higher (not more than 10%) if your trading capital is small. Once you have decided on a particular amount to allocate for each trade, you would then need to determine what is the stop loss level ie. the risks that you are willing to take for each trade. For instance, in stock trading, you should stop out your trade once the stock price losses about 20% of its value. The purpose of money management is to protect or preserve your trading capital if your trade(s) goes awfully wrong. Money management also helps avoid over-trading so that you would not increase your trading "bets" to take revenge of earlier losses. Let's face it, even if you have entered a so-called high probability winning trade, you could still very well lose money in that trade if unexpected circumstances happen in the market. Thus, by practising strict money management on each trade, you would not experience the fear of losing a large fortune if a single trade failed miserably. You could then put your focus more on refining your trading technique to find another trading opportunity and you would have sufficient trading capital left to take up such trading opportunities.

As more & more people are getting versatile with internet surfing and that broadband internet access is becoming more readily available, more traders are now trading with an online trading account. Thus, trade execution and trade management is simply a matter of making a few mouse clicks in an online trading account. There is of course a short learning curve in learning how to do trade online but most online brokerage houses have extensive help menus and real-time customer service representatives to guide you step by step. Setting up a stop-loss and the setting up of a trailing stop-loss are 2 important trade management procedures that every trader has to adhere to. As mentioned earlier, setting up a stop-loss in every trade is part of a good management habit to protect your capital in case a trade goes against you. I would recommend that you set up your stop-loss immediately after executing your trade to prevent you from hanging on to a losing trade once your stop-loss has been hit. There is no point in hanging on & hoping that your trade would recover. There would be other trading opportunities available to you in the market. If you keep letting your trading position hit past your stop loss level & feel frustrated as your losses pile higher, you would not have the confidence or composure to put up another trade which might turn out to be profitable. Thus, be disciplined in your trading and follow your stop-loss level strictly. This would usually be set as a conditional order in an online trade.

When your trade becomes profitable, it's then time to put up a trailing stop-loss so that you can ride your profit if the stock price keeps trending in the correct direction. The trailing stop-loss can also capture the maximum profit achievable if the stock price starts reversing and hit the trailing stop-loss level. This will somehow control your greed of hanging on too long on a profitable trade without taking any precaution that a dramatic price reversal would wipe out all your profits. It would also arrest your fear of taking your profits too soon when you can let the trailing stop loss ride your profit higher. Again, setting up a trailing stop-loss, either percentage based or dollar value based, is conveniently achieved with a click of the mouse in an online trade.

Thus, to handle your emotions of fear & greed during trading, exercising proper money management & trade management would be the two best ways to counteract them. You must remember that with a good trading setup, your trade might have a high probability of success but even such a trade could very well go wrong at times, and your best protection would be proper money management & setting up of an appropriate stop loss.


Tony Chai

Sunday, December 07, 2008

Training Up to Be a Better Trader

Greetings Fellow Options Traders :

It’s been almost 5 years since I started trading stock options. I’ve decided not to trade the earnings gapping analysis technique any more. It has too much 50/50 elements of chance involved in it. I’ve experimented with many different indicators to predict the anticipated direction of gapping after earnings but alas, these indicators did not point to the correct direction of gapping consistently.

When trading this technique, I have to treat every position as potential 100% losing trades because most of the time the option would become worthless once the stock price gapped in the opposite direction after earnings announcement.

I’m currently attending Mr Michael Woo’s TFAL trading course and I’ve almost completed it. In my opinion I find Michael’s course provides the soundest foundation for anyone who truly wish to embark on the journey to become a serious, professional trader. The course is divided into 20 lessons (2-hours each) spread over 5 months. Michael's lessons encompass mainly on the skills of technical analysis. He taught us some very good trading setups based on certain technical indicators and/or chart patterns recognition. I felt the most important point that he has driven home was stressing the need to wait for price confirmation before entering any trade. Let the price action determines the entry instead of entering a trade prematurely even though you might have spotted a fantastic trading setup. Michael's course also covers other significant aspects of trading like money management, trading psychology & trade management.

Michael said to be a successful trader is easy as long as one follows the trading rules. I felt that these words were a great wake-up call to most of us since we would have, at certain points in our trading journey, allowed our hard-earned capital to be devastated by our in-disciplined trading habits like impatience, over-trading, not using & sticking to stop loss etc.

Currently, I would like to take some time to train up the trading methodologies & other aspects of trading that I’ve learned from Michael's course. I would certainly return to share my trading experiences once I’m ready.

Best of luck in your trading.

Yours Truly,

Tony Chai

Saturday, October 11, 2008

A Trade on INFY

Dear fellow options traders :

Noted that Infosys Technologies Ltd (ticker : INFY), an IT company providing information technology enabled business solutions, would be reporting earnings on 9 Oct 08, after-market-close.

I believed a lot of you have witnessed how the global stock markets were hammered hard by the tumultuous financial turmoil recently. This financial crisis, which stemmed from the bad sub-prime mortgages created a few years ago, was so bad that even the gigantic US$700 billion bailout package and the global efforts to cut interest rates, couldn't stop the continuous plummeting of the stock markets in these 2 weeks.

By the way, I've checked that the industry sector where Infosys Technologies Ltd (ticker : INFY) belonged to, ie. Technical System Software, did not perform too well either. I've also read from research analysts' comments in that most firms would cut their IT budgets in such a drastic economic environment.

Thus, I put up a limit order to buy a near-the-money Oct 30 Put option at $190.00 on Friday, 3 Oct 2008 when INFY was trading around $31.00.

On Monday, 6 Oct 2008, the US stock market plunged severely in the opening trading hours. When I saw the share price INFY plunged beyond -$2.00 around 10.00am EST, I quickly put up a limit order to sell my position at $440.00, which was executed pretty fast because the stock price plunged quickly beyond -$3.00 near 10.30am EST.

In such a volatile & depressing stock market environment, that was an opportunity where profit could be earned without me taking the risks to hold on to the position till earnings announcement on 9 Oct 2008.

Anyway, on 10 Oct 08 before-market-open, Infosys Technologies Ltd (ticker : INFY) reported Q2 earnings of $0.56, $0.01 better than the consensus of $0.55; revenues rose 19.0% year/year to $1.22 bln vs the $1.21 bln consensus. However, INFY reset its FY09 revenue growth rate guidance at 13%-15%, down from 19%-21%. On 10 Oct 08, INFY gapped down -$2.00 to $23.25 & closed at $23.91.

Yours Truly,

Tony Chai

Sunday, September 07, 2008


Dear Fellow Options Traders :

To be fair, I believe you should read the following news articles before you read about my trades on earnings gapping analysis technique. Thank You.

At least 218 here have off-the-shelf degrees - 29 Aug 08

Uni lashes back at news report - 5 Sep 08

Yours Truly,

Tony Chai

Thursday, August 28, 2008

A Losing Trade on Daktronics Inc (DAKT)

Dear fellow options traders :

Noted that Daktronics Inc (ticker : DAKT), a company which specialized in electronic scoreboards & large electronic display systems, would be reporting earnings on 26 Aug 2008 before market opened. A look at the industry sector in which DAKT belonged to showed that there were hardly institutional money flowing in.

Also checked news and read that the sluggish US economy could curtail revenue expansion. I felt since that since the credit crisis was far from over, it could also affect the company's business. Thus, I bought an in-the-money (ITM) Sep 20 Put option for $215.00 on 25 Aug 2008 when DAKT was trading around $18.50. Why ITM? Because DAKT was not really a big mover for earnings in the past. Thus, I want to capture as much intrinsic value in my premium as possible if the stock price moved towards my anticipated direction after earnings.

On 26 Aug 2008 before market opened, DAKT reported Q1 earnings of $0.22 per share, $0.07 better than consensus of $0.17; revenues rose 33.3% year/year to $161.2 mln vs the $141.5 mln consensus. The company reiterated its financial guidance for fiscal 2009, expecting net sales to increase by more than 20% over fiscal 2008 and operating margin would range from 8.0-9.5%.

On 26 Aug 2008 when market opened, DAKT gapped up about +$2.50 to $20.50. I quickly closed my position when the Sep 20 Put option could still fetch $100.00. Unfortunately for me, DAKT's stock price did went down intra-day, especially after the conference call which commenced at 11.00pm EST, to close at $17.40 at the end of the day. But I've learned through the hard way to execute my stop loss while I still could get back some capital instead of hoping & praying that the stock would move towards my desired price level.

But something which amazed me was that on 25 Aug 2008 (eve of DAKT's earnings date) about 3.00pm EST, DAKT dropped like a rock for about -$0.70 from $18.75 to as low as $18.05 during that one hour before market closed. Made me wonder whether the panic selling was initiated so that they could be pick up cheaper before market close. Of course, on the following day, the position would make a handsome profit when the stock gapped up after earnings.

Yours Truly,

Tony Chai

Sunday, August 10, 2008

Trades on WFMI & PCLN

Dear fellow traders :

Traded 2 counters that I've highlighted to my newsletter subscribers for earnings gapping analysis.

The first was Whole Foods Market Inc (WFMI), which reported earnings on 5 Aug 08 after-market-close (AMC). Found that the management had to cut expenses and to minimize stores expansion to keep the margin in-check. In this tight economic conditions & with competitions coming in, analysts expected WFMI FY09 earnings to be down to $1.33 vs. consensus of $1.55. I bought a near-the-money Aug 22.50 Put on 5 Aug 2008 for $155.00 per contract when wFMI was trading around $22.80.

On 5 Aug 08 AMC, WFMI reported Q3 earnings of $0.24 per share, $0.07 worse than the consensus of $0.31; revenues rose 21.6% year/year to $1.84 bln vs the $1.91 bln consensus. The co. also issued downside guidance for Q4, expected EPS of $0.13-0.15 vs. $0.27 consensus. Co issued downside guidance for FY09, expected EPS of $1.08-1.14 vs. $1.52 consensus. In addition, the co. would be suspending its quarterly cash dividend for the foreseeable future.

On 6 Aug 2008, WFMI gapped down -$4.10 to $18.87 when market opened. I sold the Aug 22.50 Put when it could fetch around $401.00 per contract.

The other counter, Inc (PCLN), was a paper-trade as I assessed the options premium to be overly inflated as a worthwhile trade. PCLN also reported earnings on 5 Aug 08 AMC. As PCLN past earnings gapping range was between $15.00 to $20.00 in previous quarters,I paper-traded a Aug 110 Put for $580.00 per contract when PCLN was trading around $115.00.

On 5 Aug 08 AMC, PCLN actually reported impressively that Q2 earnings were $1.55 per share, $0.14 better than the consensus of $1.41; revenues rose 44.4% year/year to $514 mln vs the $495.7 mln consensus. Q2 gross travel bookings increased 70.9% y/y vs. co's guidance of 65%-75%; international gross travel bookings increased 80.1% y/y vs. co's guidance of 80%-90%. However, the co. issued in-line guidance for Q3, expected EPS of $2.00-2.15 vs. $2.05 consensus. Co also expected Q3 year-over-year increase in gross travel bookings of ~44%-54%, with intl gross travel bookings of ~58%-68%. The Co. raised guidance for FY08, expected EPS of $5.50-5.85 vs. $5.54 consensus, up from prior guidance of $5.25 to $5.65. The management commented that economic uncertainty and high fuel prices were affecting the broad travel market and significant airline capacity reductions in the fall would have a negative impact.

On 6 Aug 08, the market didn't react well to PCLN earnings and PCLN's share price gapped down -$15.50 to $101.72 and moved down further -$4.50 intra-day to close at $97.17. I sold the Aug 110 Put for $1,340.00 at the point when PCLN touched $97.00 (ie. -$20.00).

Yours Truly,

Tony Chai

Saturday, July 12, 2008

Urgent : Uninstall Zone Alarm for the Moment

Hi :

If you or anyone you know have problems connecting to the internet during the past 2 days, it might be because the recent upgrade that you've downloaded for Zone Alarm causing this problem. Uninstall Zone Alarm from your PC at the moment. Spread this message to anyone whom you think might encounter the same problem.


Tony Chai

Latest : You can now solve this problem by going to this link.

Monday, June 23, 2008

A Trade on CarMax (KMX)

Dear fellow options traders :

Noted that CarMax (ticker : KMX), a retailer of used cars, would be reporting earnings on 18 Jun 2008 BMO (before market opens).

We are facing a difficult environment where oil kept pushing towards US140 a barrel & consumers are tightening their spending. I felt that CarMax (KMX) would have a tough earnings quarter just like their recent reported quarters in this economic environment. A look at the industry ranking chart of KMX shows that the industrial sector where the company belonged to was apparently weak.

I bought a Jun 17.50 Put on 10 Jun 08 for $60.00. KMX share price actually went up from 16 to 17 Jun 2008, 2 days before earnings. On 18 Jun 2008, KMX reported Q1 earnings of $0.13 per share and might not be comparable to consensus of $0.22. Revenues was up 2.9% year/year to $2.21 bln vs the $2.28 bln consensus.

The management reported that sales slowed during the quarter, and since Memorial Day weekend, traffic and sales weakened further. The company also temporarily suspended guidance on comparable store sales and earnings for fiscal 2009.

Thus on 18 Jun 2008, I sold the Jun 17.50 Put for $130.00 around 10.00am EST.

Yours Truly,

Tony Chai

Saturday, May 24, 2008

Some Trades to Share

Dear fellow options traders,

This was a bearish week. The Dow Jones industrial average fell almost 400 points on Tuesday & Wednesday (20 & 21 May 08) due to crude oil reaching record price of US134 per barrel. The market was down also due to the bleak economic assessment from the Federal Reserve meeting minutes.

I've recommended a few US equities for this week's earnings gapping analysis to my newsletter subscribers. Most of these companies saw their stock prices gapped down after earnings announcement.

I've traded the Jun 35 put option for Red Robin Gourmet Burgers Inc (ticker : RRGB), which operate casual dining restaurants in the US and Canada. I was a bit concerned about the US consumers spending habit in view of the weak economical environment. Besides, I checked from that RRGB garnered a high short interest of almost 50% of the float, indicating that investors were mostly pessimistic of this stock. The Jun 35 put were bought at $60.00 per contract. After earnings announcement, RRGB gapped down -$1.20 to $37.46 and intra-day went down -$2.40 to close at $35.05. I closed the put option position for about $120.00 on 21 May 08 shortly after the market opened.

I've also bought a Jun 17.50 put option for Blue Coat Systems Inc (ticker : BCSI), maker of hardware appliances and software for WAN technology, for $45.00 per contract on 20 May 08. I did not buy the nearer 20 strike because I felt the stock price might gap up or might not even gap at all since it's very near the 52-week support stock price level. On 22 May 08, BCSI reported a miss of 7 cents for their Q4 earnings' EPS (earnings-per--share) and the stock price gapped down -$5.60 to $17.00 when market opened. I sold the put contract at $145.00.

On 22 May 2008, I've bought a Jun 30 put option of Black Box Corp (ticker : BBOX), a company which provide various network infrastructure services, at $80.00 per contract. On 23 May 2008, I sold the contract for $130.00 shortly after the market opened.

Hope you had a profitable week too.

Yours Truly,

Tony Chai
Options Trading Resources

Thursday, May 01, 2008

A Trade on Visa and Garmin

Dear fellow options traders :

Noted that Visa Inc (ticker : V) would be reporting earnings on 28 Apr 2008 after-market-close. Actually way before Visa's earnings announcement date, I've noticed that the implied volatility of the May options were still not overly inflated. Thus, on 18 Apr 2007, I bought 1 contract of May 75 Call for $140.00 per contract and 1 no. of May 80 Call for $45.00 when Visa was trading around $70.00.

On 28 Apr 2008, eve of earnings announcement, Visa (ticker : V) has already reached $75.00 and the implied volatility has already jumped to 54% compared to less than 50% when I bought the call options.

Thus, before waiting for earnings announcement after-market-close; and we knew how unpredictable the share price would react after such announcement, I sold the May 75 Call at $500.00 for a profit of about $360.00 (excl. commissions). I retained the May 80 call for the possibility that Visa's share price might gap up if they would announce good earnings.

On 28 Apr 2008 after-market-close, Visa reported Q2 earnings of $0.52, $0.07 better than consensus of $0.45; revenue was up 22.0% year/year to $1.45 bln vs the $1.43 bln consensus. However, the management expected lower operating margin later in the year due to increased expenses. The share price gapped down close to -$5.00 to $71.00 in the after-market trading after the earnings conference call. I was prepared that my May 80 call would be worthless tomorrow.

On 29 Apr 2008, Visa gapped down very quickly to $71.00 when market opened. I didn't think much about it until I saw Visa rebound to about $76.00 near 12.00pm EST where I could now close my May 80 Call for a profit. Thus I sold the position at $155.00 for a profit of about $110.00 (excl. commissions). I understand that if I've held on till 30 Apr 2008, both of my positions would have earned much, much more money since Visa soared to about $83.00. I would be bluffing if I said I didn't regret selling too early but past experiences have taught me to close an option position when I still could have a profit. In the past, I've ever encountered watching my option position gaining a +$300.00 profit and turned into a losing one just within 1 hour due to my greed to earn more and not being willing to let go of the position when I saw my profit eroding fast.

But I have to congratulate those who have hang on to their call positions till 30 Apr 2008 for a hefty profit on Visa. I would certainly take note of this incident for Visa's next earnings announcement.

After I closed my trade on Visa, I shifted my focus on Garmin (ticker : GRMN) which would be reporting earnings on 30 Apr 2008 before-market-open. I've researched that the PNDs (portable navigational device) were not selling well recently. The share price of SiRF (ticker : SIRF), a leading GPS chipmaker, was down since Feb 2008 due to weak GPS/PND demand. On 8 Apr 2008, TomTom lowered its 2008 revenue outlook after cutting prices for its personal navigation devices during the first quarter, pushing its shares to a 32-month low. A look at the industry ranking chart of GRMN also revealed that this sector was also weak.

Thus, I bought a May 40 Put option for Garmin (ticker : GRMN) for $80.00 per contract on 29 May 2008 when the share price was trading at $46.00. I did not but a May 45 Put because I was a little concerned that GRMN has already reached its support level and might not gap down after earnings announcement.

On 30 Apr 2008, Garmin (ticker : GRMN) reported Q1 earnings of $0.69, $0.06 worse than consensus of $0.75; revenue was up 34.9% year/year to $663.8 mln vs the $705.1 mln consensus.

On 30 Apr 2008 when market opened, GRMN gapped down -$6.00 to about $40.00 around 10.00am EST. I was thinking that if more bad news were revealed during the earnings conference call which would commence at 11.00am EST, the share might be punished further. But during the conference call, although it was announced that the company expected full year ASP (average selling price) to decline 25%, GRMN attempted to rally. Thus, I closed the position at $150.00.

Yours Truly,

Tony Chai
Options Trading Resources

Sunday, March 30, 2008

A Trade on Apollo Group Inc (APOL)

Dear fellow options traders,

Noted that once again Apollo Group Inc (ticker : APOL), an education provider, would be reporting earnings on 27 Mar 2008, after-market-close.

Apollo Group Inc (APOL) reported a great Q1 earnings quarter back in 8 Jan 2008, where the stock price gapped up accordingly after earnings announcement. Earnings were good partly due to when the economy weakened, working adults would enroll for degree programs to upgrade themselves. Although the US economy has somewhat weakened further this time round, I was a little concerned whether the enrollment figures for the degree programs could drop due to the recent tightening of student loans, the outcome of none other than the worsening credit crunch environment.

A look at the industry ranking chart of at indicated that the "Education Service" sector is not looking healthy recently.

Besides, APOL has already gapped up 3 times in the past 3 quarters of earnings announcement and I felt that it has over-extended its expectation for another gap up based on earnings announcement. I have written something related about this in an earlier blog entry.

With APOL trading at $59.00 intra-day on 27 Mar 2008, eve of earnings announcement, I realized that the at-the-money (ATM) Apr 60 Put hit a high of almost $5.00 per contract. As APOL had in the previous earnings quarter gapped at least $6.00 followed by an intra-day share price movement of $4.00 for a potential total price movement of $10.00, I decided to paper-trade the next out-the-money (OTM) Apr 55 Put at the price of $2.85 per contract.

On 27 Mar 2008 AMC, Apollo Group Inc (APOL) reported Q2 earnings of $0.41 per share, excluding non-recurring items, $0.11 worse than the consensus of $0.52; revenues rose 14.0% year/year to $693.6mln vs the $703.5mln consensus. Tighter credit conditions made it more difficult and expensive to finance higher education, thereby challenging Apollo's model. Earlier this year, the company was found guilty of securities fraud and estimated damages and associated expenses would range from $120 million to $216 million.

On 28 Mar 2008 when market opened, APOL gapped down as much as -$14.00 to $42.00 within the few minutes and I sold off the Mar 55 Put position immediately for a paper profit of $845.00 (including commissions).

Yours Truly,

Tony Chai
Options Trading Resources

Sunday, March 23, 2008

A Trade on Guess? Inc (GES) - going thru the motion

Dear fellow options traders :

Understand that Guess? Inc (ticker : GES), a renown maker of apparel and accessories, would be reporting earnings on 19 Mar 2008 after market close.

Checked that the research analysts' comments about GES upcoming Q4 earnings results were mostly positive & they expected their earnings to be strong. But I was a bit concerned about GES future earnings outlook since the US is entering into a recessionary phase. I've also checked the Industry Ranking Chart and found that the 'Apparel Stores' industry sector was not improving. However, to be fair, GES did report strong earnings from Europe and Asia in their previous earnings quarters.

Guess? Inc (ticker : GES) past earnings gapping range was between $4.00 to $6.00. GES stock price was trading near $35.00 on 18 Mar 2008, the eve of their earnings announcement. That was an ideal stock price to pick up an at-the-money (ATM) option of strike price 35. I've checked the web-site and found that the implied volatility of GES options was not too far off from the historical volatility. In fact, the GES Mar 35 Put option (with 1 day till expiration) was selling about $1.25 when GES was trading around $34.98 around 11.00am EST. As GES might report a strong Q4 earnings quarter, I decided to purchased the Mar 35 Put with a limit order price of $1.00. The order was fulfilled when GES hit $35.75 intra-day.

On 18 Mar 2008 after market close, Guess? Inc (ticker : GES) reported Q4 earnings of $0.59 per share, $0.02 better than the consensus of $0.57; revenues rose 29.9% year/year to $514.6 mln vs the $470 mln consensus. But the Co. issues mixed guidance for Q1, expecting EPS to be lower at $0.44-0.46 vs. $0.47 consensus; while expecting Q1 revenues to be in-line at $445-460 mln vs. $450.62 mln consensus. Co. also issued in-line guidance for FY09, expecting EPS of $2.35-2.45 vs. $2.45 consensus; and FY09 revenues of $1.97-2.05 bln vs. $2.05 bln consensus.

When market opened on 19 Mar 2008, GES gapped up +$1.00 but quickly lost steam. I studied the Level 2 Code and understood that the buyer side was building up. As I've bought a put option, I wasn't going to beat the trend and hoped that the drop in GES share price would carry on intra-day. Thus, I salvaged the trade and cut my loss by selling the Mar 35 Put at $0.90 around 9.42am EST when I realized that the selling volume was diminishing (the red volume bar - bottom chart circled in blue). From then on, GES moved up intra-day about +$3.00 to close at $37.19. If I had hung on to my position hoping that GES stock price would drop intra-day, the Mar 35 Put that I've just sold would not have fetch a single cent.

Yours Truly,

Tony Chai
Options Trading Resources

Sunday, March 02, 2008

A Losing Trade on Deckers Outdoor Corp (DECK)

Dear fellow options traders :

Noted that Deckers Outdoor Corp (ticker : DECK), a maker of footwear for outdoor activities, would be reporting earnings on 28 Feb 2008 after-market-close.

The market has been particularly weak during this week from a few factors, which could potentially weaken the economy ahead. These factors include :

1) The Euro hit an all-time high of $1.5229 against the US dollar on 28 Feb 2008, Thursday.

2) Similarly on 28 Feb 2008, Thursday, crude oil contract jumped $2.95 to a record settlement price of $102.59 a barrel.

3) On 27 Feb 2008, a below consensus GDP report, an above consensus Initial Unemployment Claims data and weak new home sales report all added bearish sentiments to the market.

I've also checked the Industry Ranking Chart at and found that the institutional money inflow for the "Textile - Apparel/Footware" industry has slipped a bit in the last 2 weeks.

That prompted me to trade a bear trade for DECK. Since implied volatility has pushed the stock option premium higher on the eve of earnings announcement, I did not buy a straight put contract but instead I set up a paper-trade bear call spread on 28 Feb 2008 by selling 1 no. of Mar 130 Call and buying a Mar 135 Call to collect a premium of about $160.00 (excluding commissions) when DECK was trading around $127.00.

On 28 Feb 2008 after market close, Deckers Outdoor Corp (DECK) reported a spectacular Q4 (Dec) earnings results. Q4 earnings per share was $2.69 per share, a whopping $0.28 better than the First Call consensus of $2.41. Revenues rose 56.2% year/year to $194.2 mln vs the $184 mln consensus. The company expected earnings to grow at a slower rate during the first half of the year, but still see Q1 revenues to be $90.70mln (vs. $89.56 mln consensus) and FY08 revenue growth of approx 25%, which calculates to $561.20mln (vs. $530.85 mln consensus).

The earnings results were good but the stock was punished when market opened on 29 Feb 2008. DECK gapped down -$8.00 when trading opened at 9.30am EST. The stock price tried to made an upward recovery for a while but I observed the Level II Code closely and held on to the position until about 10.00am EST. The stock price attempted to make a 2nd upward movement again thus I decided to close the bear call spread.

The credit spread was closed with some losses although the stock price gapped down because :-

(1) The commissions to set up & exit the credit spread were expensive if you were to compare to discount brokers like Interactive Brokers who charged only $1.00 per entry or exit per contract.

(2) The stock price didn't gap down significantly at the moment I closed the trade. Volatility was still present in the Mar 130 Call when I sold it off and could still fetch a high of $280.00 although the stock price has tanked to $117.00.

I could have gained some profits if I held on to the credit spread till the end of the day since the stock went down -$15.00 intra-day to close at $110.64. But I've learned the discipline to cut my trade when the signals to exit appeared instead of relying on hope & pray to get out of a position.

Yours Truly,

Tony Chai
Options Trading Resources

P.S. If you want to understand more on how to make use of the Industry Ranking Chart for Sector Analysis, you can read up 2 excellent articles at Afraid to :-

Afraid to Trade Article #1

Afraid to Trade Article #2

Saturday, February 02, 2008

A Credit Spread on Intuitive Surgical Inc (ISRG)

Dear fellow options trader :

As mentioned in my previous entry using a credit spread on Apple Inc. earnings, options are getting expensive for stocks about to announce earnings. This is due to build-up of huge implied volatility in the options premium and the current volatile situation of the stock market.

Checked that Intuitive Surgical Inc (ticker : ISRG), maker of the da Vinci surgical systems, would be reporting earnings on 31 Jan 2008 (Thursday) after-market-close (AMC).

A look at the volatility chart of ISRG revealed that the implied volatility of the stock options has increased to more than 80% till the eve of earnings announcement day compared to the 30-days historical volatility of about 60%. This meant that the options premium would once again be expensive due to the built-up of high implied volatility.

Chart courtesy of

With such high implied volatility, I understood that the further strikes out-the-money options could still fetch some good premium value. Thus, I set up a credit spread where I sold 1 no. of Feb 220 Put and bought a 1 no. of Feb 210 Put and collected a premium of about $260.00 (excluding commissions) per trade. This bull put spread was set up when ISRG was trading at around $242.00, meaning the Feb 220 Put I sold was about $20.00 out-the-money.

The bull put spread was set up basically due to my bullish outlook of ISRG share price after earnings announcement. The bull put spread would make money (ie. I could collect the full or partial $260.00 credit, excluding commissions) if ISRG share price would gap up a lot, stay the same or drop a little after the earnings announcement. In addition, with the collapse of implied volatility after earnings, that could provide an opportunity for me to buy back the sold leg cheaply if I want to close the sold leg.

I felt Intuitive Surgical Inc's has dropped far too much since Jan 2008 for a company which has not much competition in the specialised field of providing robotic-surgery tools. Although research analysts were generally mixed about slowing placements of the da Vinci systems and concerned whether ISRG would be able to withstand the credit crunch, I read from a's report that the installed surgical robots still need expensive disposable supplies to function, and the more practice the doctors receive, the more disposables they would use up. For 2 days on 29 Jan 2008 & 30 Jan 2008, ISRG dropped more than -$38.00 to $235.00. I felt that if ISRG could report good earnings quarter, the share price could recover this loss of $38.00 during the past 2 days and could went up a little further. There were also other signals that I looked for and I would certainly share the information with my fellow opt-in subscribers list when the time is right as I would need to test-run them for a few more earnings quarters and to see whether they are consistent.

On 31 Jan 2008 AMC, Intuitive Surgical Inc (ticker : ISRG) reported Q4 earnings of $1.24 per share, $0.20 better than consensus of $1.04; revenues rose 68.2% year/year to $189.4 mln vs the $175.9 mln consensus. The management were pleased with the company's fourth quarter revenue, income, and cash flow growth.

On 1 Feb 2008 (Friday), ISRG gapped up +$38.00 to $292.00 and went up as high as $307.00 (another +$15.00) intra-day. I bought back the Feb 220 Put sold leg when market opened. I could have let the Feb 210 Put bought leg expire worthless but in order to illustrate the outcome of this credit spread, I closed the position and incurred an exit commission. I felt that this credit spread could have been more cost-effective & I could have collected a higher premium if it was administered with a discount broker since the commissions would be cheaper.

The Lunar New Year is approaching and I wish to take this opportunity to Wish Everyone a Healthy & Prosperous New Year !!!

Gong Xi Fa Cai !!! Huat Ah !!!

Yours Truly,

Tony Chai
Options Trading Resources

Saturday, January 26, 2008

A Credit Spread on Apple Inc. (AAPL)

Dear fellow options traders,

I remember when I started out trading options in 2005 based on earnings gapping, the options premium were not as expensive as of today. The stock options premium could be inflated due to a few reasons, but one of them would be high implied volatility. If a company's share price has been gapping exponentially after earnings announcement for a few consecutive quarters, the market makers would normally priced in this gapping range into the options premium, thus injecting high implied volatility into the premium.

As you might have already known, if you intend to trade a straight call or put option for earnings gapping, you must first predict the anticipated direction correctly, no excuse about that. Secondly, you must pray that the gapping magnitude/scale of the stock price right after company's earnings announcement would be large enough to cover the collapse of implied volatility of the options premium right after earnings announcement. I guess if you have been a premium subscriber of, you would have noticed a news alert entitled "OPTNX Unusual Options Activity" where it would inform you that volatility have decreased for certain stocks which have just reported earnings. So, do remember that options premium price would usually fall right after earnings announcement, due to implied volatility collapse.

But I would definitely discourage you from doing naked options selling even though these options might be a few strike out-the-money (OTM). Although it might seem lucrative to naked sell an option to take advantage of the collapse in implied volatility right after earnings in the hope to buy back the option cheaper afterwards, you would undoubtedly be exposed to unlimited risks! It is especially risky if you're selling naked call options since a company's share price could rise infinitely after a particular event.

Thus this time round, I decided to use a credit spread to trade Apple Inc. (ticker : AAPL) earnings announcement. I've done my research and felt that Apple Inc. should be able to beat Q1 earnings and as usual they should be once again issued conservative guidance for Q2 just like the previous few quarters.

As mentioned earlier, stock options for companies reporting earnings were getting costly and options for Apple Inc. (ticker : AAPL) were no exception. Thus, on 22 Jan 2008, I set up a paper trade bull put credit spread of selling 1 no. of Feb 145 put and buying 1 no. of Feb 140 put for a credit of around $165.00 when AAPL was still trading around $156.00, meaning that the Feb 145 put option that I've sold was a whopping $11.00 out-the-money.

So why a credit spread? You may ask. Well, due to high implied volatility of AAPL stock options, the options premium that could be collected were still attractive although they were a few strikes away. Secondly, the credit spread strategy would be less risky compared to a straight option position since it has 3 situations where it could make money :

1) if the share price went up
2) if the share price stay the same
3) if share price only drop a little

However, if the share price dropped a lot, my credit spread ie. bull put spread would lose money, the maximum loss being the difference of the strike price ie. $500.00 and of course the commissions for setting up the credit spread.

On 22 Jan 2008, Apple Inc. (ticker : AAPL) reported Q1 earnings of $1.76 per share, $0.14 better than consensus of $1.62; revenues rose 35.0% year/year to $9.61 bln vs the $9.47 bln consensus. As expected, the company issued downside guidance for Q2, expecting EPS of $0.94 vs. $1.09 consensus; while Q2 revenues were expected to be 6.8 bln vs. $6.98 bln consensus. But the market reacted negatively to the shortfall in iPod shipments, where the company registered 22.1 mln units vs ~25 mln units street expectation.

On 23 Jan 2008 when market opened, Apple Inc. gapped down by almost -$17.00 to $136.20. As mentioned earlier, my bull put credit spread would lose money if the share price dropped a lot. Thus, I was prepared to lose money in the position. But I understand that if Apple Inc. (ticker : AAPL) share price could go up intra-day, I might be able to close the position with a smaller loss.

Thus, I monitored the stock chart and Level 2 code carefully but once I saw that AAPL has difficulty moving up, I close the position by buying back the Feb 145 put and sold off the Feb 140 put for a loss of $174.00 (The $165.00 credit that I've received earlier for setting up the position helped defray some of the loses).

If I would have bought a straight Feb 165 call which cost $810.00 per contract when AAPL was trading around $155.00, where the call option was almost $10.00 out-the-money but still costs $810.00 per contract, I would have lost more money compared to the credit spread that I had set up.

Thus, in way, the credit spread has helped minimize the loss of more capital if you had committed it in a straight option position in this situation. I hope this would provide you an alternative idea if you intend to trade earnings gapping next time.

Yours Truly,

Tony Chai
Options Trading Resources

Note : On 22 Jan 2008, the Dow Jones Future plunged more than 500 points. The U.S. Federal Reserve quickly moved in to cut a un-precedented 75 basis points to the interest rate in an effort to revive the market. On 23 Jan 2008, the Dow Jones Industrial Average sank as much as 323 points before bouncing back to rise 298.98 points, or 2.5 percent, to 12,270.17.

Saturday, January 19, 2008

A Trade on Genentech Inc (DNA)

Dear fellow options traders :

Noted that Genentech Inc (ticker : DNA), a major pharmaceutical/biotech company which research and market mainly oncology drugs, would be reporting earnings on 14 Jan 2008 (Monday) after-market-closed (AMC).

Pharmaceutical companies seldom gapped up or down dramatically after earnings announcement. Their price gapping action derives mainly from FDA decisions on their Phase III clinical trials or New Drug Approval (NDA) applications, but that's another big topic altogether. But there were occasional exception to this instances though...

1) Amgen Inc (ticker : AMGN) : On 20 July 2005, AMGN gapped up +$7.00 to $77.51 and went up intra-day another +$4.00 to close at $81.17 when this biotech company's Q2 earnings-per-share (EPS) beat consensus by $0.16 and revenues rose 22.7% year/year to $3.17 bln. The company also issued upside guidance for FY05.

2) Invitrogen Corp (ticker : IVGN) : This biotech company makes and markets research tools in reagent, kit, and applications forms for the life sciences research, drug discovery, and diagnostics customers, as well as biological products manufacturers. It has good price gapping habit after earnings announcement in the past few quarters. I would share with my opt-in subscribers about the gapping behavior of this company when they report Q4 earnings sometime in Feb 2008.

Then why do I want to trade an option on Genentech Inc (DNA) since it has not much gapping action for earnings, you may ask.

Well, what caught my attention was that this company's share price went up +$5.00 to $71.50 for past few days before earnings announcement without really "fantastic" news. In fact, some comments from the research analysts were somewhat "conflicting". For example, I've read one of the following...

"We remain bullish on DNA's performance, adjusting their estimates, but remaining above consensus. Due to lower than expected script trends,we reduce their revenue ests for 4Q07 to $3.03 bln from $3.04 bln, slightly above the Street estimate of $2.93 bln. For the quarter we expect non-GAAP EPS of $0.70, three cents above consensus at $0.67. We have observed a continued reduction in Lucentis use, and speculate that this is due to cannibalization from off-label Avastin use. Based on available script data, we do not expect to see an appreciable impact of the recent ODAC meeting on the use of Avastin factoring into fourth quarter numbers."

I don't know whether you understand the above but to me the comments were neither positive nor negative. I felt that if DNA couldn't report a spectacular Q4 earnings on 14 Jan 2008 AMC, the earlier $5.00 rise in stock price earlier might not be justifiable and the stock price might suffer after earnings announcement.

On eve of DNA's earnings announcement ie. 14 Jan 2008, when I saw the support price level of $71.80 was broken, I bought a just-out-the-money Jan 70 put contract for about $55.00 per contract.

As I monitored that the stock price kept breaking down intra-day and that I've researched that DNA didn't gap much for previous earnings announcement, I set a stop loss for the position to be closed if the bid price hit $1.00 (I bought at the limit price of $0.55). The bid price was hit intra-day and I gained a profit of $45.00 (excluding commissions).

On 14 Jan 2008 AMC, Genentech Inc (DNA) reported Q4 earnings of $0.69 per share, $0.02 better than the $0.67; revenues rose 9.4% year/year to $2.97 bln vs the $2.97 bln consensus. The company only issued in-line guidance for FY08 The company also reported revenue of some of their companies' drugs which fell short of the consensus numbers.

On 15 Jan 2008 when market opened, DNA gapped down -$1.20 to $68.50. I could have sold the option position at a slightly higher price if I'd held on but I was contented I was able to get out of the position with a small profit. It also show that this company did not have much gapping price movement for earnings announcement.

Yours Truly,

Tony Chai
Options Trading Resources

Note : Lucentis and Avastin are both drugs manufactured by Genentech Inc (DNA)

Saturday, January 05, 2008

A Trade on Bed Bath & Beyond Inc (BBBY)

Dear fellow options traders :

First of all, I want to wish everyone a Prosperous 2008 with your options trading!!

Checked that Bed Bath & Beyond Inc (ticker : BBBY) would be reporting earnings on 3 Jan 2008, after-market-close.

Bed Bath & Beyond Inc operates a retailer chain selling a range of domestic merchandise and home furnishings products. My first thought was naturally geared towards whether the company's business would be affected by the current housing market slump. As we know, the housing market have been hit quite badly for the past 2 years. Investors by now should be fully aware of the fallout of the sub-prime mortgage sector and the alarming rate of mortgage defaults & foreclosure. On 28 Dec 2007, the housing market plunged deeper into despair as it was reported that in Nov 2007, sales of new homes plummeting to their lowest level in more than 12 years, heightening fears that the US might be thrust into a recession. New-home sales tumbled 9% in November 2007 from October 2007 to a seasonally adjusted annual sales pace of 647,000, the worst sales pace since April 1995.

At the same time, I read from a report that BBBY's operating margin has been slumping for the past few quarters. It was also reported that in first six months of Bed Bath's fiscal year 2007, the chain generated just less than $125 million in free cash flow and yet the company went ahead with the share repurchase program.

I've studied that BBBY's past gapping range after earnings was around $2.00. Thus, on 3 Jan 2008, I paper-traded 2 lots of near-the-money Feb '08 27.50 put at $140.00 per contract when BBBY was trading around $27.50.

On 3 Jan 2008 after-market-close, Bed Bath & Beyond Inc (BBBY) reported Q3 earnings of $0.52 per share, which included $8 million tax gain and might not be comparable to the consensus of $0.52; revenues rose 10.9% year/year to $1.8 bln vs the $1.77 bln consensus. But the company issued downside guidance for Q4, expecting EPS to be $0.64-0.67 vs. $0.78 consensus; and would be expecting flat comps for Q4.

On 4 Jan 2008 before market opened trading, the Dow future was already down more than 100 points when disappointing employment data were reported. The December non-farm payrolls came in at only 18K. The economists were expecting payrolls to increase by 70K. The unemployment rate was also at an alarming rate of 5.0%, giving further hint of a possible economy slump. The market didn't react well to BBBY's earnings too, as the stock price gapped down -$2.30 to $25.12 when market opened trading.

I watched the Level 2 code, candle stick chart movement and trading volume and sold the 2 lots of puts for $300.00 a contract when I noticed that the selling pressure (circled in red in the chart) has precipitated. The paper profit was $290.00 after deducting commission.

Yours Truly,

Tony Chai
Options Trading Resources

P.S. BTW, I've just completed an e-book entitled "How To Avoid The 5 Silly Options Trading Mistakes I've Made",which is rather self explanatory on how you could save your hard-earned capital by learning from the money-losing experieces that I have encountered during my options trading journey. You can claim this e-book for FREE by sending an email to Once you're in the mailing list, I would also be sending you emails at time where I would highlight potential stocks for earnings gapping analysis trade for your consideration. So do look out for them :)