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 Prophet.net 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 Prophet.net Industry Ranking Chart for Sector Analysis, you can read up 2 excellent articles at Afraid to Trade.com :-

Afraid to Trade Article #1

Afraid to Trade Article #2

5 comments:

Ronald Lee said...

Hi Tony

Another classic example of good earnings, gapped down scenario. I wonder how many people got burn.
You should have an account with IB, they are the cheapest esp when you play spread. By the way did you try out my bearish reversal system?

Tony Chai said...

Hi Ronald :

I used OptionsXpress virtual trading platform for my paper-trade thus their commissions structure were applied.

I've been reading up your bearish reversal technique and have yet to do the stock screening yet. I've tried the technique to paper trade NFLX but these few days the stock did not move much. Would monitor the position closely.

Regards,

Tony Chai

Singapore Stock market said...

http://www.redotinvest.net/
http://www.redotinvest.info/
http://redotinvest.com/

Big R said...

I very much enjoy your posts. Please keep it up!

Anonymous said...

Predicting the market doesn't have to be about speculating on the next 100% 2-week gain. Understanding when the odds weigh heavily in favor of a stock or index, moving in either direction, can also clue you in as to when it's a good time to hedge your biggest position, or even exit a position before it moves against you (like Bear Stearns - WOW!).

More on this at: www.FreeOptionsEducations.com