Revisiting a trade from an article I wrote on Corning Inc., I spoke about the stock being stuck in a trading zone. This is what I wrote: "Corning (GLW) has stated that LCD prices are easing. But it does not expect sales volumes to rise later this year. For this reason I expect the stock to continue to trade in the zone it is now in for some time to come this year. The stock has been trading between 12.50- 14.50 for months." So I looked at making a trade accordingly going down—bear put spread.
The Options Play
- Buy an August 2012 put with a '14' strike (priced at $0.75)
- Sell an August 2012 put with a '13' strike (priced at $0.39)
- Net Debit to Start: $0.36
- Maximum Profit: $0.64
Reasoning behind the Trade
- Even though some industries are picking up, some are still depressed and pricing won't get better until the last quarter of the year.
- There is no significant stock moving news to think it will suddenly take off in a bullish direction.
This trade turned out good and I reversed my position as follows:
- Sell the Aug. 14 $2.78
- Buy the Aug. 13 $1.83
- ($2.78 - $1.83)= $0.95 gross profit
- ($0.95 - $0.39 net debit)= $0.56 net profit.
- ROI- 144%
Observations:
- I traded with the trend.
- The timing was good at the top of the Bollinger bands.
- The huge drop for that type of profit was just (lucky timing). There is a part of this phrase that makes up big gains and it is usually separate from the research an investor can go.
Revenue Miss
Corning hit a new 52-week low of $11.11 and is showing strong upper resistance at about 12.32. Even though the stock looks like it is in the slumps, Standard & Poor's still gives it a 5 star buy rating. This quarter it reported revenues of $1.9 billion, barely short of the $2.02 analysts projected. Earnings of $0.31 per share were in-line with analyst estimates. Net income fell to $462 million, or 30 cents a share, from $755 million, or 47 cents, a year earlier. This is what may have been the contributing factor to its knee jerk decline.
Because of this reaction to declining net revenue, Jefferies reiterated a Hold rating on Corning Inc. (GLW) and lowered its price target from $14.00 to $12.25. Investors are hoping the "price environment" in the display business evens out as the company believes it will. But Jefferies believes the stock will continue to trade in a range bound pattern for the near future.
Click to enlarge
I believe the same movement will be in place for Corning that I stated before; it just may be a little lower now. So I am going to use the same trading zone strategy but a Bull Call Spread. What will be different this time is that I will buy the first option (in the money) and not position myself above '12' since the point of resistance is about 12.35.
The Options Play
- Buy a November 2012 call with a strike of '11' (ITM) (priced at $0.91)
- Sell a November 2012 call with a strike of '12' (priced at $0.43)
- Net Debit to Start: $0.48
- Maximum Profit: $0.52
- Maximum Risk: net debit
- Maximum Length of Trade: 4 months
Reasoning Behind The Trade
- LCD prices will keep the stock hampered through the rest of the year.
- It is in a trading zone presently and looks like it has good support.
- Again, no catalyst exists to send the stock on a long bullish run at the present.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
