Earlier this week, I profiled RealD‘s (RLD) upcoming earnings release and showed investors and option traders several different ways to play a possible 10% move in the stock and a possible triple-digit profit with the right option. It is part of my goal to teach people how to find profitable stock and option trades by showing how to do research and chart work to better your odds of success and to give you a feel for how I trade.
I had mentioned after years of following the company and the movie business industry, my thoughts on RealD have been bearish. I covered its past four earnings quarters and how shares reacted, and I had a good feeling a double-digit percentage move was coming.
RealD shares are trending lower again today following Wednesday’s 11% shellacking and drop from $10.39 to $9.25.
I mentioned it would be a pivotal quarter for the company as the suit-and-ties were expecting a profit. While RealD did report $0.10 a share in the black, it was a penny short of estimates. Revenues also whiffed after sales of $55 million came up short versus estimates north of $61 million for the recently ended quarter.
I profiled the RLD September 10 puts (RLD140920P00010000) at $0.55 ahead of the news to play a possible move back to $9-$8. Now trading at $1.10, the September 10 puts are showing a paper profit of 100%. If you got into the trade, take half profits off the table and let the rest ride with a tight stop at 80 cents.
As a strangle option trade, the RLD September 12.50 calls (RLD140920C00012500) obviously took a hit and went from a quarter to a nickel. As insurance, this less riskier option trade would have cost 80 cents round trip – 55 cents for the calls and 25 cents for the puts – and is up 25% overall, despite the 80% spanking the call options took.
Again, I had a near-term price target of $9-$8 and I always like to remind my subscribers this: Plan the trade and trade the plan.
With these types of returns, it is imperative to lock-in profits.
I still believe shares will trade in the $8s but most traders get greedy and wait too long to take profits. This can turn profits into losses and why I say to always stick to the game plan. While there may be a little more juice in this melon to enjoy, the parameters of the trade have been met.
Looking ahead at new trading opportunities, Wednesday’s lackluster action was a good sign today that could favor the bears so I may be back with a put option to play.