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


hlhk said...

Dear Tony,
A friend told me abt yr blog and I have been reading it over the long weekend. I have learned so much from you. I have been trading options for a while but have not been profitable and really wanted to give up. Your postings really encouraged me to start afresh again. You are so disciplined in cutting losses, an area which I failed miserably and that has caused me to lose so much of my hard earned money.
I have a few questions which I hope you can answer:
1) Among so many companies that are reporting earnings, how do you identify which one to play?
2) how do you find out how much the company gapped in the last few earnings?
3) after you have identified a company to play, what are the steps that you take b4 deciding whether to play put or call
4) how big a loss would you tolerate but selling the option?

Tx in advance for yr help

hlhk said...

Dear Tony,
I have been following yr blog with much interest. Would appreciate very much if you could help me with the below questions:

1) among so many cos that report earnings, how do you choose which one to play?
2) after you have selected a particular company, what are the steps you take to decide whether to play call or put?
3) how do you check back how much a company has gapped in the last few earnings...manually by looking at the graphs or some websites?

Thanks for yr help


Tony Chai said...

Hi Pauline :

As some of the answers to your questions involved techniques that I've learned from Freely Course, I would send you a reply by email.

Thanks for your encouragement. To be frank, if you notice my postings, you'll realize that I encounter lots of ups & downs with the earnings gapping analysis technique.

I hope that would at least give a little caution to fellow traders who think they can get rich-quick with options trading after attending a 3-days seminar.

I'm not saying you can't achieve such wealth in such a way since there are such testimonials around.

May be I belong to the group who still has to put in the hard work & am learning in this journey and no harm sharing my experiences to fellow traders along the way.

Tony Chai