Stockbee: June 2007

A Guide to Using Options to Play Earnings

June 30, 2007

Smart Money has a couple of articles on using options to trade earnings. If you are option trader, you may find them interesting. But some of the most profitable trades after earnings are on little known companies with no options. When HANS or NTRI had first earnings acceleration, they had no options.

EARNINGS SEASON REVS up this week, and speculative trading on corporate reports will dominate the options market for the coming weeks. This is a time for investors who understand the fundamentals of stocks to use options to potentially extract extra value from their shares.

The time-honored technique for speculating on earnings reports is buying at-the-money or slightly out-of-the-money calls to benefit from an expected increase in the underlying stock price. Some speculators like to sell puts whose value will decline should the stock advance.

Both of those strategies are already evident in the market, but as this earnings season is expected to usher in a decline in earnings growth a new technique may be in order — namely the stodgy, old strategy of selling calls against long stock, which is known as over-writing.

Simplicity is the key

In the world being dominated by algorithms and complex quant models and super secret macro models, simple things can beat the market by wide margin. The FT has a review of The Dhandho Investor – The Low-Risk Value Method to High Returns by Mohnish Pabrai , that is the message of the book.

Third, invest in simple businesses. “If it takes more than a short paragraph,” he says, “there’s a fundamental problem. If it requires me to fire up Excel, it is a big red flag that strongly suggests that I ought to pass.” He likes funeral homes: it is easy to show that demand for their services is consistent. The first Patels had no choice but to forego complex analysis tools.

This guy manages 500 million and has no assistant traders or other employs like most hedge funds have. He has a bed in his office, takes naps in office and has 29% annualized return since inception. Then there are people with Bloomberg terminal, real time data feeds, multi monitors and army of people working for them and can't beat market. At the end of day speculation is very personal skill. Those who get it use very simple techniques and simple ideas.

Analysis paralysis

June 29, 2007

Value Discipline makes a valid point about analysis paralysis.

Discipline is incredibly important, but don't bury yourself in the details. I can recall Buffett describing his spending about half an hour in his analysis of General Dynamics submarine business shortly before buying a 15% stake in the company.So many investors get caught in analysis paralysis or intellectual constipation...you need to execute to own. Analysis and thinking is required but the obvious bargains are...obvious!

Ability to quickly grasp the potential of an idea is very important in the market. I have been reading The Dhandho Investor: The Low - Risk Value Method to High Returns by Mohnish Pabrai , in that book he again talks about quick and dirty analysis to take 10% stake in a company. In fact Pabrai says if you have to open Excel to run number, you should pass the idea. Obvious stories on value side or growth side are so obvious, that you can make up your mind in minutes.

When I look at Episodic Pivots candidates, it takes me few minutes to decide whether this has legs or not. If something is not obvious, or catalyst is not apparent, I just pass it on. The key to doing quick analysis is having a deeper perspective about markets and faith in your methods.

The obvious temptation

The obvious temptation when any problem like that of Bear Stearns hedge fund hits the news is to pile on to it. Everyone is on the same side of argument saying this is disaster waiting to happen. From macro commentators to day traders to cartoonist everyone is piling on to the obvious argument.

The obvious argument for last 4 years has been colored by the dot com period market behavior. That is why majority has been waiting and waiting and waiting for the bear market to kick in which will lead to 50% drop. The obvious arguments are easy and intellectually lazy arguments. Most time they stem from ignorance. But one thing is sure if you get convinced by the obvious argument it costs you money in the market.
On the other side of obvious arguments is hidden, less apparent argument. If you are bearish or bullish , you must still try and figure out the not so obvious arguments.

Intelligent speculation and risk taking is all about not listening to obvious arguments. The mass media likes obvious arguments and that is why it is often wrong. Opportunities are in hidden arguments.On the other side of the trade for last four years have been people who have successfully stayed on the right side of market. There might be some merit in their arguments. So before jumping on to obvious argument, as a speculator one must think of ten other less obvious arguments. The dissonance between the two view points provides the profit opportunity.

The iPhone stands for something very simple -- freedom.

Apple iphone mania continues. The stock price has not budged for days. But the hype machine is running in full speed.
As usual "the Great Leader" Steve Jobs has message for the faithfuls.

Apple faithful,

Today we make history. Today we change the world. Today we put a dent in the universe. Today -- 29 June 2007 -- we release iPhone. It has taken years of work from all parts of Apple. First advertising, of course. Then feng shui consultants, and design and engineering and manufacturing. Countless emergent designs, countless meetings, countless all-nighters to make every part of the iPhone, from its custom-made integrated circuits to its sleek glass screen and metal case, absolutely perfect. To those of you who serve under me at Apple, I say this: Yes, I have berated you, and insulted you, and exasperated you. Yes, I've fired your friends for no reason, and made you work harder than you ever thought you could work. Yes, I've taken you away from your spouses, your children, your transgendered domestic partners. In some cases your devotion to me has cost you your marriages. You've sacrificed a great deal for this. But has it not been worth it? For the rest of your life, you'll be able to say that you were working at Apple when the iPhone was introduced. You were here on the day when the course of human history was changed forever. Plus, you'll get a free 4-gigabyte iPhone, a $500 value. Not bad, right?

Already, around the United States, thousands of Apple faithful are lining up outside our retail shrines, waiting for iPhone. Some will approach on their bare knees, like pilgrims approaching the shrine of the Virgin of Guadalupe in Peru. Just a few minutes ago we received a report that Apple faithful are also lining up outside retail shrines around the globe, even though those stores do not have iPhones and will not have them for months, maybe years. The response is, in a word, stunning. We are saving the satellite photos showing the clusters and will use them as part of our promotional material. Apple employees, view these photos and see what you have done, and then go home and tell your children -- those smallish people who live in your house, the ones you haven't seen in a couple of years -- tell them, You see those people suffering outdoors, enduring the heat and rain and monsoons just so they can get a cell phone? I did this. This was my work.

And the best part is .....

The iPhone stands for something very simple -- freedom. Apple faithful, you march today in the tradition of the marchers at Selma, in the tradition of Gandhi at the Salt March to Dandi. You have made your point. There are some things, you said, that are worth suffering for. I am proud to have given meaning to your life. I am proud to have invented iPhone and designed iPhone and brought iPhone to the world. I feel, in a way, humbled by your adoration. But in another way not humbled. Anyway. My whole life has built up to this moment. I believe that this is what I was put on the earth to achieve. I thank you all for sharing this historic day with me.

Namaste. Much love. Peace out.

Dear Leader

CANSLIM 70 plus EPS- Bearish

Labels: Canslim

Looking at which stocks in the CANSLIM 70 plus EPS universe are witnessing distribution or breakdown, gives you a good idea about sector trends. It also gives you a list of possible short ideas. Disappointment after being high performer on EPS often makes a good short. So paradoxically good EPS stocks offer both, long and short opportunities.

On the bearish side the market does a very god job of anticipating trouble and most of the time leading stocks start breaking down or witnessing distribution much earlier than it gets reflected in their earnings trends. This obviously due to the fact that high performing stocks are highly visible and are scrutinized more. That is why when it comes to playing short side going strictly by earnings trends does not work. You have to anticipate likely earnings deceleration. Which makes it tough job. That is one of the reason why short side is tougher to play.

Stocks with 70 plus EPS down 4% or more on higher volume:
AMSWA,American Software Inc A (Google  Yahoo  Earnings  Chart)
ARGN,Amerigon Inc (Google  Yahoo  Earnings  Chart)
DRIV,Digital River Inc (Google  Yahoo  Earnings  Chart)
ESEA,Euroseas Ltd (Google  Yahoo  Earnings  Chart)
EZPW,Ezcorp Inc Cl A (Google  Yahoo  Earnings  Chart)
LXU,Lsb Industries Inc (Google  Yahoo  Earnings  Chart)
MLHR,Herman Miller Inc (Google  Yahoo  Earnings  Chart)
MTL,Mechel Steel Group OAO ADS (Google  Yahoo  Earnings  Chart)
PKD,Parker Drilling Co (Google  Yahoo  Earnings  Chart)
RHT,Red Hat Inc (Google  Yahoo  Earnings  Chart)
SXE,Stanley Inc (Google  Yahoo  Earnings  Chart)

Market Monitor

Fed said the same things, it has said for many months. But the drama around the announcement continues. Fed has stopped raising interest rates since many months. Historically that has been bullish.
It was mixed day for market with momentum on long side continuing. 103/39 bullish to bearish breakout ratio demonstrates that.
The second day of Fed announcement is when real trend manifests itself. Currently the market is still stuck in two months range and there is no clear directional bias. Short term tactical plays with tight stops is the play in such market conditions.
Earnings have started trickling in and PENX yesterday demonstrated the effect of Earnings on stocks price. There will be several PENX kind opportunities for speculators in coming month and half. Those who know how to speculate can find good opportunities in most market circumstances.
There are also opportunities on short side with many stocks breaking down. Looking at list of 4% breakdown in IBD EPS 70 plus list can give you idea of leaders breaking down.
Next week is holiday weekend, so moves will be exaggerated.

CANSLIM 70 plus EPS

June 28, 2007

Labels: Canslim

Few weeks of correction has many new stocks coming in IBD 70 plus EPS scans. Some of these are just starting out their rally and might be worth investigating.

ABXA,ABX Air Inc (Google  Yahoo  Earnings  Chart)
AME,Ametek Inc (Google  Yahoo  Earnings  Chart)
BBW,Build-a-bear Workshop (Google  Yahoo  Earnings  Chart)
CMTL,Comtech Telecommun Corp (Google  Yahoo  Earnings  Chart)
CPA,Copa Holdings S.A. (Google  Yahoo  Earnings  Chart)
CPLA,Capella Education Company (Google  Yahoo  Earnings  Chart)
CPO,Corn Products Intl Inc (Google  Yahoo  Earnings  Chart)
CRNT,Ceragon Networks Ltd (Google  Yahoo  Earnings  Chart)
EDU,New Oriental Edu And Tech Corp (Google  Yahoo  Earnings  Chart)
HMIN,Home Inns and Hotels Management (Google  Yahoo  Earnings  Chart)
IFOX,Infocrossing Inc (Google  Yahoo  Earnings  Chart)
IOM,Iomega Corp (Google  Yahoo  Earnings  Chart)
IPAR,Inter Parfums Inc (Google  Yahoo  Earnings  Chart)
IRIS,Iris International Inc (Google  Yahoo  Earnings  Chart)
KAI,Kadant Inc (Google  Yahoo  Earnings  Chart)
LCC,US Airways Group Inc (Google  Yahoo  Earnings  Chart)
MGPI,Mgp Ingredients Inc (Google  Yahoo  Earnings  Chart)
PENX,Penford Corp (Google  Yahoo  Earnings  Chart)
PPS,Post Properties Inc (Google  Yahoo  Earnings  Chart)
PRAA,Portfolio Recovery Assoc (Google  Yahoo  Earnings  Chart)
PVTB,Privatebancorp Inc (Google  Yahoo  Earnings  Chart)
SILC,Silicom Ltd (Google  Yahoo  Earnings  Chart)
SNHY,Sun Hydraulics Corp (Google  Yahoo  Earnings  Chart)
TSL,Trina Solar Ltd. (Google  Yahoo  Earnings  Chart)
TTI,Tetra Technologies Inc (Google  Yahoo  Earnings  Chart)
YGE,Yingli Green Energy Hlds Co (Google  Yahoo  Earnings  Chart)

Relevant post: CANSLIM 70 Plus EPS- Casting a wider net

Son Of Double Trouble

The question to ponder is what makes these stocks make such rapid move. What catalyst precipitate such rallies. Answer to that question can help one design strategies wich get you in to some of these stocks before they make these moves. 32 stocks out of the 35 in this list had a Episodic Pivot in last six months or less. That can be the starting point.

AFSI,AmTrust Financial Services Inc. (Google  Yahoo  Earnings  Chart)
AQNT,Aquantive Inc (Google  Yahoo  Earnings  Chart)
BHIP,Natural Health Trends Corp (Google  Yahoo  Earnings  Chart)
CBTE,Commonwealth Biotech Inc (Google  Yahoo  Earnings  Chart)
CORT,Corcept Therapeutics (Google  Yahoo  Earnings  Chart)
CRNT,Ceragon Networks Ltd (Google  Yahoo  Earnings  Chart)
DSTI,Daystar Technologies Inc (Google  Yahoo  Earnings  Chart)
DYII,Dynacq Healthcare Inc (Google  Yahoo  Earnings  Chart)
ENG,Englobal Corp (Google  Yahoo  Earnings  Chart)
FSLR,First Solar Inc (Google  Yahoo  Earnings  Chart)
FTK,Flotek Industries Inc (Google  Yahoo  Earnings  Chart)
GHM,Graham Corp (Google  Yahoo  Earnings  Chart)
GTI,Graftech Intl Ltd (Google  Yahoo  Earnings  Chart)
HOKU,Hoku Scientific Inc (Google  Yahoo  Earnings  Chart)
IDSA,Industrial Svcs Of Amer (Google  Yahoo  Earnings  Chart)
INSW,Insweb Corp (Google  Yahoo  Earnings  Chart)
KMGB,Kmg Chemicals Inc. (Google  Yahoo  Earnings  Chart)
LPHI,Life Partners Inc (Google  Yahoo  Earnings  Chart)
MCZ,Mad Catz Intract (Google  Yahoo  Earnings  Chart)
MTOX,Medtox Scientific (Google  Yahoo  Earnings  Chart)
NEXS,Nexxus Lighting Inc (Google  Yahoo  Earnings  Chart)
NGA,North American Galvanizing & Coatings Inc (Google  Yahoo  Earnings  Chart)
NVTL,Novatel Wireless Inc (Google  Yahoo  Earnings  Chart)
ONT,On2.Com Inc (Google  Yahoo  Earnings  Chart)
RCCC,Rural Cellular Corp (Google  Yahoo  Earnings  Chart)
SBEI,Sbe Inc (Google  Yahoo  Earnings  Chart)
SIF,Sifco Industries Inc (Google  Yahoo  Earnings  Chart)
SMTX,Smtc Corporation (Google  Yahoo  Earnings  Chart)
SNHY,Sun Hydraulics Corp (Google  Yahoo  Earnings  Chart)
TBSI,TBS International Limited Class A (Google  Yahoo  Earnings  Chart)
TBUS,Digital Recorders Inc (Google  Yahoo  Earnings  Chart)
TNH,Terra Nitrogen Co L.P. (Google  Yahoo  Earnings  Chart)
TRCR,Transcend Services Inc (Google  Yahoo  Earnings  Chart)
VMSI,Ventana Medical Systems (Google  Yahoo  Earnings  Chart)
XRA,Exeter Resource Corporation (Google  Yahoo  Earnings  Chart)

What is your goal

What is your goal in trading. Basically you have a simple choice: to make money or search for market meaning or higher truth also called holy grail. To make money in the stock market there are many ways . As long as you make money it does not matter whether you follow value or growth or quanti or technical analysis approach. As long as you are not doing something illegal which will jeopardies you profits it is ok to use any esoteric method. .

If you are looking to make money, there are hundreds of ways to do it. Most of them are in public domain.It might take you some time to understand and execute them, but that is tactical problem. You may have sub optimal profitability till you get it, but there is no great rocket science to it. The process involved is simple rule making.

Now if you are the second type looking for holy grail, there is long and interesting road ahead of you. You are looking for perfection. The perfect indicator. The perfect model. The perfect source of earnings data. You want 0 second latency in your data transmission. You want the rest of market participants to perfectly act according to your hypothesis. You want perfect level of valuation or pullback. You want perfect psychological state to trade.

You are likely to be one of those who emails me 64 point clarification questionnaire on earnings strategy, or wants to know exactly how many cents above or below one should enter on Episodic Pivot candidates. Or you are on to 34th, improvised version of Double Trouble. Or want to run endless back tests. You can keep doing that.There is an entire industry which caters to people like you. There are newsletters,softwares, training courses, mentoring services, psychologists, con artists and hundreds of other ways to keep you busy. While you keep searching for that elusive perfection,the market has been rallying since 2002. There were hundreds of opportunities to make money with imperfect rules and broad guidelines.

Find a approach that works like the Investors Business Daily or Boucher or Buffet. Adopt it to your style.Do not worry so much about whether you can yourself come with original idea. After few years you will find your own original ideas.The holy grail in trading is imperfect and simple things work: if you want to make money.

Homebuilders are ready for a bounce

Babak at Trader's Narrative is cautiously optimistic on homebuilders. Considering the amount of negativity on them, they are primed for 20% plus bounce. I would look at taking positions in GFA, AVTR, BHS, NVR and some more at this levels. No guts, no glory. When there is blood on the street, sometime you find easy money.

If you think the financial sector has been roughed up, check out a long term chart for the homebuilders. They’ve gotten crushed.

Although it is always most difficult, it is rewarding to step in and buy when no one else is. Right now sentiment and the technicals have reached a crescendo of pessimism that usually signals an inflection point.

Take a look at the chart to the left. It is a survey from the National Association of Home Builders (NAHB) showing that only 28% of them see the housing market as “good or fair”. To put it in perspective, this is the lowest reading in 16 years. Very gloomy. Very doomy. Wouldn’t you say?

And there’s more. An economist with Moody’s economy.com wrote recently, “The bottom of the housing market appears nowhere in sight”. Ouch.

Market Monitor

The Paris Hilton effect. Buoyed by the release of Paris from captivity the sullen market woke up and rallied.
Volume however was lacking.
The The major indexes started the day lower, plunging at the opening bell.But a rally among tech stocks led a turnaround for the Nasdaq.
However only 167 stocks were up 4% or more in Market Monitor universe. Weak selling and weak buying has been the characteristics of this market for many days now.
The month end and quarter end effect should keep the momentum going for few weeks.
But under the surface some leaders continue to get in to trouble. e.g. CROX and TNH
Keep a close eye on the homebuilders. A bounce from this level is free money. As Trading Goddess says look at the volume on CTX.

Stocks up 50% or more in a month has reached 3, which often signals a sustainable few weeks bounce zone.

Son Of Double Trouble

June 27, 2007

There wereno qualified 4% breakout in the list today. KMGB and NGA might be a buy here.ONT, NGA, SIF, IDSA, GTI,and ENG might be worth watching for possible breakout.

AFSI,AmTrust Financial Services Inc. (Google  Yahoo  Earnings  Chart)
AQNT,Aquantive Inc (Google  Yahoo  Earnings  Chart)
BPHX,Bluephoenix Solutions Ltd (Google  Yahoo  Earnings  Chart)
CBTE,Commonwealth Biotech Inc (Google  Yahoo  Earnings  Chart)
CORT,Corcept Therapeutics (Google  Yahoo  Earnings  Chart)
DYII,Dynacq Healthcare Inc (Google  Yahoo  Earnings  Chart)
ENG,Englobal Corp (Google  Yahoo  Earnings  Chart)
FSLR,First Solar Inc (Google  Yahoo  Earnings  Chart)
FTK,Flotek Industries Inc (Google  Yahoo  Earnings  Chart)
GHM,Graham Corp (Google  Yahoo  Earnings  Chart)
GTI,Graftech Intl Ltd (Google  Yahoo  Earnings  Chart)
HOKU,Hoku Scientific Inc (Google  Yahoo  Earnings  Chart)
IAX,International Absorbents (Google  Yahoo  Earnings  Chart)
IDSA,Industrial Svcs Of Amer (Google  Yahoo  Earnings  Chart)
INSW,Insweb Corp (Google  Yahoo  Earnings  Chart)
KMGB,Kmg Chemicals Inc. (Google  Yahoo  Earnings  Chart)
LPHI,Life Partners Inc (Google  Yahoo  Earnings  Chart)
MCZ,Mad Catz Intract (Google  Yahoo  Earnings  Chart)
MTOX,Medtox Scientific (Google  Yahoo  Earnings  Chart)
NEXS,Nexxus Lighting Inc (Google  Yahoo  Earnings  Chart)
NGA,North American Galvanizing & Coatings Inc (Google  Yahoo  Earnings  Chart)
NVTL,Novatel Wireless Inc (Google  Yahoo  Earnings  Chart)
ONT,On2.Com Inc (Google  Yahoo  Earnings  Chart)
RCCC,Rural Cellular Corp (Google  Yahoo  Earnings  Chart)
SBEI,Sbe Inc (Google  Yahoo  Earnings  Chart)
SIF,Sifco Industries Inc (Google  Yahoo  Earnings  Chart)
SMTX,Smtc Corporation (Google  Yahoo  Earnings  Chart)
SNHY,Sun Hydraulics Corp (Google  Yahoo  Earnings  Chart)
SYUT,Synutra International (Google  Yahoo  Earnings  Chart)
TBSI,TBS International Limited Class A (Google  Yahoo  Earnings  Chart)
TBUS,Digital Recorders Inc (Google  Yahoo  Earnings  Chart)
TNH,Terra Nitrogen Co L.P. (Google  Yahoo  Earnings  Chart)
TRCR,Transcend Services Inc (Google  Yahoo  Earnings  Chart)
VMSI,Ventana Medical Systems (Google  Yahoo  Earnings  Chart)
XRA,Exeter Resource Corporation (Google  Yahoo  Earnings  Chart)

How to Jump Start a Trade

This article by Leo Fasciocco nicely summarizes the essence of trading earnings breakout.

There's nothing like taking an initial position and seeing it start to work for you immediately.

Many top traders advise that, if a new position starts to go against you right from the start, you are probably getting into trouble. For stock investors, it's been a tough year on the long side. As I looked over the market action of the past year, I asked myself the question: "What is 'working' for the bulls?"

The answer: "Stocks with significantly positive earnings surprises."

Some of this year's big stock winners were companies that came in with big earnings surprises.
An ideal scenario for playing an earnings surprise stock would go like this:
1. Earnings are reported and they are well above Street estimates.
2. The stock responds by moving sharply higher, sometimes gapping ahead.
3. You enter with at least a 50 percent position and then average up quickly.
4. The stock closes the day up several points. You set a protective stop.
5. Within the next few days, analysts raise their ratings and the stock rises further.
6. The stock continues in an up trend and becomes a big winner in a bull market.

Season of opportunity is approaching

Earnings season is one of the most interesting and profitable period to trade. Market participants discover new companies during earnings season. Many of these companies go on to make several hundred % moves in next couple of years.

During every earnings season there are handful of companies which have exceedingly good or bad earnings. Their earnings come as a surprise to market participants and this leads to immediate rally post earnings.

If you are prepared for this opportunity, you can make lot of money in short time. Plus you will get a crack at future leaders as they are just about being discovered by market. No matter the market conditions, every earnings season offers at least 20 to 25 good opportunities. Opportunities which will make 20 to 100% plus moves in few weeks.

If you go back and plot earnings date on stocks up 100% plus in last one year, you will quickly notice vast majority of them started moving from their earnings date.

Related posts :
How to trade earnings
How to trade earnings Part2
How to trade earnings Part3
Earnings and Bulkowski
Improving odds in earnings breakout
Earnings Season- Time to be very careful...
Earnings and Dan Zanger
Earning Surprise System for $1495
Trading Earnings Breakouts
Earnings Acceleration- Long Term Impact
Trading Earnings Breakout -Part1
Trading Earnings Breakouts -Part2
Trading Earnings Breakouts -Part3

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