ONSL may turn ugly!
Some interesting developments have occurred with this stock that should have been foreseen during the research phase of this play. I'm going to step you through my thought process so you understand how I handle the situation. If anyone has another perspective, please let me know, (hopefully before Monday). Perhaps you have an alternative I may have missed.
THE BAD NEWS: It appears that I may have stumbled on this one. I failed to consider a crucial bit of information in my analysis, and that is I opened the position too close to an earnings announcement. I believe this particular stock will be susceptible to a sharp move up or down depending on earnings on Tuesday. That is exactly what I don't want! Remember, the strategy is to play the channel for at least three trades to get all my option money off the table and trade risk free for as long as possible. With a sharp move in the price, this position could very well abort next week.
THE GOOD NEWS: My only loss will be an "opportunity loss" and not a loss of capital! That's the beauty of this strategy, in this situation, a single trade is enough to return a decent realized profit. I can easily make a "no brainer" 13% profit for the 20 days I've held this position. (My original post on Reduced-Risk Trading indicated I opened the position on 07/14/1998, which is incorrect. I actually opened the position on 07/09/1998. Sorry for the confusion.)
REVIEW OF FUNDAMENTALS
QTRLY
EARNINGS:
1995 -0.030
1996 +0.025
1997 -0.130
1998 -0.220 (YTD)
ONSL revenues the past four quarters (JUN '97 - MAR '98), have steadily increased from 12.3M to 40.2M with a net loss of 4.2M vs. a year ago income of $52k.
ONSL earnings for the past four quarters (JUN '97 - MAR '98), has been -0.01, -0.03, -0.09, and -0.22 per share respectively. Six analysts rate the stock a strong buy. Four others rate it a buy. Yet, short interest continues to climb. Check out the stats:
------------------------------ Average
Month- Shares Short-- Daily Volume
------------------------------------
06/98---- 2,783,723--- 467,038
05/98---- 2,478,917--- 871,086
04/98---- 1,296,288--- 414,134
03/98---- 1,343,578--- 636,472
With ONSL closing on Friday at 26.625, it sits at the lower end of the upper third of the BB with an RSI of 55. At this point, it's extremely difficult to predict a direction, although the indicators point to a little more upward movement and then a pullback. The only other clue is the sharp drop in price after the last negative earnings announcement back in April. It then leveled off and entered the channel it currently occupies.
Clearly, a true speculator would bet the averages and hedge on the upside since there's no evidence of any fundamental change in the downward direction of the stock. Except for a revenue and earnings suprize, the smart money seems to be betting on more negative earnings.
With poor earnings, the stock could tank or move into a lower channel of $19 or $20 - $25 - $26. With improved or blowout earnings, I would look for new support around $30. The new channel wouldn't be so bad, the position could still handle that. Dropping below $20 or popping to $30 would abort the play.
What's a poor skittish trader like me going to do?
PLAN THE TRADE AND TRADE THE PLAN
The plan calls for the stock to move between 24.50 and 28.50 every 10 - 15 days. So by Friday I would have normally expected to cover my short and go long again, completing one cycle and my second trade. However, with a major event (earnings announcement) next week, it throws a monkey wrench into the works.
The strategy is not looking for a big score by market timing sharp moves in the stock. It's looking to play the range on stocks with a predictable swing between two prices. If the stock misbehaves, then I abort with a small profit. It is times like this that greed struggles with trading discipline and traders shoot for the pot of gold in one big grab. Unfortunately, they usually lose big and get knocked out of the game.
The idea behind my version of Reduced-Risk Trading is not to win big on every trade but to simply NOT LOSE big on any trades! Taking small profits when things go wrong and working well behaved stocks for maximum profit will generate tremendous results. Let the losers go and stick with the winners.
Therefore, the next step is simple. Cover the short with my GTC order at $24.50 as planned if it dips prior to the Tuesday announcement. Cancel the GTC long order until after the announcement and I know the direction of the stock for potential "sideshow" plays. Here are the possible scenarios:
LOW EARNINGS-------------------HIGH EARNINGS
STOCK @ $20----------------------STOCK @ $30
(11.75)---- Option Investment---- (11.75)
2.00------- Long Call Value----------- 9.00
9.00------- Long Put Value------------ 2.00
4.00------- First Trade------------------ 4.00
4.00------- Second Trade-------------- 4.00
7.25------- Profit------------------------- 7.25
The value of the straddle should be at least $11 no matter which way the stock goes since it's only 20 days old in a 6-month life. If the stock doesn't dip prior to the earnings announcement and they report blowout numbers, then subtract $4 off the right column for a profit of 3.25. If it doesn't dip and they report negative, then add $4 to the left column, assuming I end the play at $20.
UPSIDE POTENTIAL: The bottom line worst case scenario to the upside with one trade is a 20 day profit of $3,250, (13% on a $25k drawdown, or 237% annualized). With two trades its $7,250, (29% on a $25k drawdown, or 529% annualized). Both potentials will be realized if I close all positions at $30 and I don't buy the stock on the way up (greed?)
DOWNSIDE POTENTIAL: The bottom line worst case scenario to the downside with one trade would be $11,250, (45% on a $25k drawdown, or 821% annualized). With two trades it's a more sure $7,250, (29% on a $25k drawdown, or 529% annualized). Both potentials will be realized if I close all positions at $20 and I don't let them ride down for further profits (greed?)
Now my job is to locate another RRT stock to trade. I have several in mind and I'll let everyone know when the analysis is done. You can also be sure there'll be at least two months before the next earnings announcement!
Any comments anyone? Herm? Doug? Greg? Others?
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