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