Electronic Arts (ERTS, $15.50, up $0.64) posted weaker-than-expected earnings after the bell and said it would delay the release of several hit games. And guess what? The stock went up. The company reported a profit of $0.56 a share versus expectations of $0.88 a share for the fourth quarter but forecast a loss for 2009.
The shares were up another 57 cents in after-hours trading last night. So what gives? Even though the company missed earnings by 32 cents (wow!), it was what they said about 2010 that caused the stock to pop in after-hours. These are the types of things that can cause “new” option traders to lose money in options. Look, we all know that nobody gets every trade right but it’s how you manage your positions that make them winners or losers.
This past Sunday night I had mentioned the EA February 15 puts (EZQNC, $0.90, down $0.25) as a possible trade before earnings. The put options were trading for 90 cents on Monday which is where they closed on Tuesday but will likely open lower on Wednesday if the gains from after-hours hold.
Before the closing bell yesterday, I mentioned in the blog that the puts were trading at $1.45 and that our profits were 60%. I also said that if you sold now, you took all of the risk out out of the trade. As a new option trader, the excitement of hitting a “homerun” takes over the smart money trade. In other words, you can get so excited because you know the company is going to miss earnings and you just know the stock is going to tank. You calculate if EA falls to $12 then the puts will be worth $3. If so, your return is 200%.
The problem is that while you were swinging for the fences, your put option was falling and you were really striking out. Instead of pocketing a 60% gain, you may now have a losing trade on your hands. That is the biggest thing with options….managing your positions.
The stock could open lower to start the day and it could even go to $12 but I don’t think that it is going to play out that way. I wanted to point this out because in reality, EA is just saying they are going to have a good 2010 but how can they possibly predict anything that far out? This is a company in transition and Wall Street must be buying the story.
Who rally cares? The smart money was already made and 2010 is a long way off.
Rick Rouse
Rick@OptionsMentoring.com
