Saturday, May 26, 2007

OVTI ER play

I have already said many times, OVTI May 31st ER will be a critical one and the outcome will be bullish biased based on my previous research. And the key issues will be

1. How substantial is the "substantial recovery" they predicted in Mar 1st CC for the next quarter (May-July) revenue

2. Any positive surprise regarding the design win especially about TrueFocus and about new production process and WLO.

The downside risk is small, the upside potential can be big with small possiblity of short squeeze.

Fig 1 the probability distribution for possible price movement after ER (assuming OE day close) I use log-normal distribution.

4 different plays with June call option, suppose you use $5000 to buy call option at the last price. as you can see the max loss is $5000, the Y axis is the histogram # generated in the simulation. the X axis is the return in dollar values.

12.5 June call (last price $2.65)

15 June call (last price $1)

17.5 June call (last price 0.35)

20 June call (last price 0.05)

the expected return of the above strategy:

the probability (in %) of losing half of your capital (here $2500)

which means using all your money buying 12.5c will give you expected return of $2677.3 with 6.9% proability of losing half of your capital

Given those number, if I want to bet ER, I will do a combination of 12.5c+15c to have the best risk/reward profile.

This is just for illustration purpose to show you why people lose so much buying OTM calls betting ER, even when it has bullish bias, the numbers are simply convincing. Therefore like I said before, for HCL ER play, play it before, play it after just don't bet on it.

What did we learn from this simulation:

1. Betting ER is never a "Sure Money" play.

2. Possible post-ER price volatility is largely priced in the short-term option price. Why should you bet it when you are essentially getting nothing (comparing with playing it AFTER you know the result) for taking a lot of risk.

3. If it is not for Hedge purpose, I see no reason buying(holding) short term options ahead of important news/earning report, long term leap option and vanilla stock shares are simply better choice.

The psychological pitfall here is people are afraid of MISSING out a major event such as a short squeeze on stock like OVTI(DNDN in the recent drama as well). However BEFORE knowing the news/ER, the real probability of such thing happening is small, it is never the focus in the probability distribution(see above Fig1). That's why I play post-ER/post-News momentum since at the first moment I get access to the data/news, I will know with very good certainty where will the price go, the above probability distribution is transformed immediated in my mind in the presence of new information, and then I see sure money lying in front of me. You will argue everyone else has seen the news, is market efficeient? Nope, I know things people don't know, simply because I know what to look for in the news/data according to previous FA research, and price movement takes time to reach its equilibrium. I play fool game with my informational and analytical advantages before most players on the market to react. TA people say, I wait for confirmation, I FOLLOW the trend, which is valid and safe move, however technical indications are always laggered, when you see them happening, you already missed most of the range.

So be a market leader not follower, however trade based on the fact you know not on what you believe, pure speculation or crapshot gambling.

Do you still worry about missing out GAP up/Gap down? Check PACT@May 24, it shooted up about 35% within one hour after I called, where is the gap you are worrying about? For my picks in this blog, this problem is the least you should worry about. Reason? I am not going to tell you, since I have already mentioned multiple times. Instead of worrying about missing out gap-up, you should focus exclusively on your downside risk. Hoping excessive return overnight without proper asset/risk management is the fastest way to wipe you out from the market.

before my post:
OVTI PPS (May 25 close): 15.05

Now 16.3 after a fantastic ER

June calls:
12.5c $2.65-->$3.85
15c $1-->$1.65
17.5c $0.35-->$0.2
20c $0.05-->$0.05

Did you see which calls are winners? Even if you can predict this would be a good ER like I did, it is still not good to bet OTM calls. If you like a company's fundamental and future, I will choose (in the order) Leap Calls(Jan 09 20c,25c etc), Stock shares, then short term option calls.

We are going to have a great week on OVTI.

Update on HNR

if you check SEC filling of HNR

Besides our very predictable and diligent buyer: Pabrai, the new impression is everyone in the company management is aquiring shares dated May 17th. Usually after getting such 0 cost shares, insiders will immediately dump them to the open market to enjoy the quick cash. Check Sec form 4 fillings from company like CRM.

What does this mean? Our party time is approaching, the management of HNR is making sure everyone on board to have a piece of pie to enjoy. Hopefully I still get time to play bigger fool game in China when the news is announced.

Thursday, May 24, 2007

May Short Interest Out

OVTI up 6.13% to 20,198,856
ACUS up 22.09% to 2,263,566
JMBA up 17.57% to 5,196,318
SIGA down (6.31%) to 2,008,772
URGI up 25.74% to 164,765