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:
$2677.3
$3900.7
$1149.6
$421.6

the probability (in %) of losing half of your capital (here $2500)
6.9000
30.3700
72.0700
94.8600

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.


Update:
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.

13 comments:

Min Chen said...

Hehe, guess what, in the perspective of operational research, that is exactly what I thought!
And as what you said, the hardest part is not to derive those policies based on the price moving probability, but the analytic power to derive those probabilities.

I will try to practise the analytic power.
Thanks.

OOSEVEN.

Liu said...

Robin, would you please how did you come with the first chart--- The probability distribution price movement after ER. Did you calculated by the option spread?

However, I will not bet on any ER right now. the distrubution of call/put ratio told us the downtrned limit is quite low , and the gap between 15 and 16 may be closed this time.

And I will sell all my 15 call before ER. Never bet on ER since you have more "sure" money in the future. That's what I did for MR and FMcN, Thanks robin :)

puppylsy

Robin said...

the first probility curve is bullish biased with my downside risk cut off at 11, and not a small possibility of a upside short squeeze, purely from my FA studies and my understanding from this stock

yes don't bet ER especially using option, you can see the risk/reward profile is not good for ER gamblers even it does have bullish bias.

Pick sure money by playing the game AFTER ER released

雪花菲儿 said...

Hi,robin前辈,如果您有时间的话能帮俺看只股票马?俺在16.23的时候买的scr先声药业,在美刚上市的一家中国医药公司。自从俺买了就一路下跌,已经跌破俺的心理底线拉,对他都快失去信心拉,您能帮俺看看还值得hold吗?俺的mit登录不上拉,只好到这里来请您指教,谢谢!!

babyduck said...

robin, 太谢谢你拉
因为这个ovti,我得帐号首次翻绿拉

Robin said...

Congratulations to everyone who made good profit on OVTI, the way I see it is it is a winner, and will continue to be a good buy-holder

to 雪花菲儿: sorry about your loss on scr, and I honestly don't know much about this company, although I saw ppl on trader168 recommending this one.

to babyduck:
cong, I hope other recommendations such as HNR and RAIL serve you well the same way as OVTI

bobby said...

Hi 雪花菲儿, I checked SCR's May 15 ER. The numbers do not look bad to me in term of the growth rate. Have you noticed the million yuan hiring ads by SCR on mitbbs? :) I think this is a profitable(2004 Jiangsu top 10 tax payer, high margin, etc...) and foundamentally sound company. Then Baidu CEO 任晋生. Kind of like his background and personality. I will keep an eye on this one as a potential long term pick.
Of course, you have got to make your own decision.

bobby said...

oh, one more thing, if you feel "对他都快失去信心拉", please check TCM's chart for some confidence.

Robin said...

to bobby,

sounds a interesting pick, I will do more homework on this one. Typically I don't like playing China concept, due to the accounting issue, the MM behaviors

雪花菲儿 said...

A million thanks to Robin and bobby. I sold it at 15.83 and it's keeping dropping. But it maybe good in the future. I checked it's website. It has some drug under approval. But Americans may not think Chinese drugs as efficient as theirs. And the volumn for scr is too small:)

Chi Yin said...

I've been looking at this stock, and it seems to have settled in the high 15's. Do you feel that it will have a chance to break $17 in the near term?

Anonymous said...

robin still alive?

sterm said...

回来了没有,被峨眉山的猴子劫了?哈哈。