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


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k said...

Id check your premise that DAKT doesn't have earnings volatility. You should have waited for the conference call which played during market hours that morning - insight into selloff.

Tony Chai said...

Hi K :

Thanks for your insight.

I hoped you have made money that way.

I prefer to execute my stop loss while I still can get back some money.


Tony Chai

Joul said...

Hi Tony,

Glad you executed your stop loss and preserve the cash.

I have an open position stuck with DLTR at the moment due to greed. I am planning to hold until next week when market volume runs back to normal. Too much market manipulation based on the think volume prior to long weekend.


Tony Chai said...

Hi Joul :

It's just that I've experienced many times holding on to an option position waiting for share price to rebound but ended up the premium being eaten up by time decay.

I've learned that when I'm wrong in the anticipation in an option position, it's time to cut the position and move on to the next trade.

I think you might have bought DLTR for earnings. This stock hardly moves for earnings.

Take care,

Tony Chai

Kris said...

Hi Tony,

How long before each earnings announcement, that you started to buy into any position? Just curious

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Anonymous said...

Hi tony,

May i know why you still excute the trade even the stock chart is not 45 degrees downside?


Tony Chai said...

Dear Alex :

Frankly, trading the earnings gapping technique has no logic whatsoever.

It's pure gambling, really :)

Haven't you encounter times when earnings were good, a company's stock price could still gap down and vice versa when earnings were lousy.

I've already switched to a swing trading system - at least its more logical.

You can find out more info from :

Star Trading System

Tony Chai