MorningWord 9/10/13: Lazy Boy $FIO

by Dan September 10, 2013 9:28 am • Commentary

MorningWord 9/10/13:  There are  many attributes that contribute to a consistent profitable trading regime, but from my experience, none are more important than persistence.   Back on Aug 6th, prior to FIO’s disastrous fiscal Q4 earnings report (that subsequently sent the shares down 23% the following day to new all time lows), I took a look at the stock (here) as the nearly 35% short interest offered the potential of a squeeze on the least bit of good news.

Yesterday,  FIO (the storage company that specializes in data-center management) was up 25%, its 3rd largest volume day in the last year with massive options volume of 51k calls trading, compared to only 9k puts.    The most active lines were the Oct 14 calls with 5300 trading, Sept 12 calls with 4400, Sept 14 calls with 3900 and Oct 13 calls with 3500.  The surge was the result of WDC’s $685 million acquisition of private company Virident, which caused investors and analysts alike to speculate that WDC’s arch enemy STX would be forced into a deal to buy FIO.

Back in early Aug I did not pull the trigger or a trade on the stock as the fundamental situation appeared to be deteriorating, and despite at the time suggesting:

new management, after a string of mishaps by their predecessors, may look to guide fiscal 2014 below expectations when they report their Q4 tomorrow and create a situation where they can set the stage for a series of beats, this could obviously cause a re-tracement of some of the recent strength

And that was what they might have done, helped with the obvious poor results.  So, while I avoided a disaster back in Aug, I should have circled back on my cautiously positive trade thesis:

we have a situation where a stock is very oversold, sentiment is poor (short interest 35%) and with very neutral Wall Street analysts ratings, 11 Buys, 13 Holds and 2 Sells), high concentration of top holders (top 10 own about 60% of the float) and sky high implied volatility.  The stock could be up 20% on the slightest bit of a good news.

Well the stock is up again this morning in the pre-market, nearly filling in the entire earnings gap from Aug.  My sense would be that this would not be the appropriate time to find that good ol’ persistence, as the easy money has likely been made, and now I would just be playing for a potential outcome that has already been priced in to some degree in the stock and the options, dramatically reducing my chances of success.  Just like the old market adage goes about being “greedy when everyone fearful and fearful when everyone greedy”, from my own trading experience it pays to be persistent when some investors get lazy.  Unfortunately in this situation I was lazy.