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