Trade of the Week – Is RealD the Real Deal or a Done Deal …

ByDave Tony case, company, current, facebook, highway, midday-update, movie, oculus, russell, stock, summer Comments Off

MomentumOptionsTrading.com Midday Update for 8/5/2014

Trade of the Week – Is RealD the Real Deal or a Done Deal?

1:00 p.m. (EST)

RealD (RLD, $10.47, down $0.15) will be reporting their numbers after the close today. The company is expected to earn a profit of $0.11, on average. The chance for an earnings surprise is high, as the 11 analysts that cover the stock have estimates ranging for a profit of $0.05-$0.17 a share.

In the year-ago period, RealD lost $0.03 a share and has been bleeding money for four straight quarters. However, they have managed to “beat” Wall Street’s estimates each quarter over the same time period.

With a profitable quarter penciled in, this will be a make-or-break announcement for the company.

I have usually recommended bearish option trades on RealD in the past when shares were in the mid-teens, but I feel trapped on another bearish trade if this is a turnaround story.

The movie business has struggled for much of the summer, and RealD’s focus is in 3-D. While there have been a few decent flicks of late, overall, 3-D has lost its pizzazz as movie goers shun higher ticket prices. Some theaters are offering Daily Double features, as is the case with the recent “Dawn of the Planet of the Apes” movie.

The 52-week range for shares have a yearly peak north of $13 and a low of $6.19.

In early May, shares moved from $11.10 to $11.89 after earnings, or 7%, and reached an intraday high of $11.91. The following session, shares tripped $12.30 intraday for a 10% move over a two-day period.

In early February, RealD zoomed from $8.64 to an intraday peak of $10.69 before settling at $9.44 after “beating” estimates. This represented a 24% pop from the prior close to the intraday peak.

On Nov. 11, 2013, shares jumped from $7 to $8.76 following “better-than-expected” losses — not profits, but losses — and made an incredible move of 25% on the beat.

The stock has a very high short-interest float of 9% with a short-interest ratio, or days to cover, of eight trading sessions.

To dummy things down, this means that a short-squeeze could occur if the company does actually turn a profit. This could happen on an unexpected product announcement, or innovation-type upgrade, to the current 3-D glasses. I doubt RealD has that in their pipeline. Perhaps Facebook (FB, $72.85, down $0.66) does with its recent acquisition of Oculus (for $2 billion), but not RealD.

The RealD September 12.50 calls (RLD140920C00012500, $0.20, flat) are “cheap” options to play on a possible move towards prior 52-week highs. At two dimes, shares would need to be at $12.70, technically, by mid-September for the trade to break even. At $13, these call options would be $0.50 “in-the-money,” and the return would be 150% from current levels.

Of course, this would require a 20% upside move in the stock.

The RealD September 10 puts (RLD140920P00010000, $0.55, up $0.05) could be used as “insurance” in case shares decline 10%-20% on an earnings miss, which would put the stock at $9-$8. For double-nickels, these options also look “cheap.”

At $9, the aforementioned put options would double from current levels, as they would be worth a buck. A trip to $8 would also make this a 150% winner, as they would be worth at least $2-$2.10.

By buying both the calls and puts, the cost of the trade would be $0.75. Shares would then need to be at $13.25 or $9.25, technically, by mid-September for the strangle option trade to break even.

I like these odds better than rolling with the calls or puts straight-up because I have never been a firm believer in the company’s business model. RealD could surprise to the upside, but I would use a safety net in case they let the suit-and-ties down.

Heading into the second half of today’s gig, the bulls are behind the 8-ball once again.

The Dow is lower by 70 points to 16,498, while the S&P 500 is off 9 points to 1,930. The Nasdaq is down 14 points to 4,370, and the Russell 2000 is gaining 2 points to 1,127 (a bullish sign, perhaps).

I saw a CVS truck rolling down the highway on a midnight coffee run last night. I knew it would either be a good or bad omen for one of the current trades. Fortunately, it was good one, as the company beat Wall Street’s estimates and raised guidance.

Subscribers, hit the Members Area for the updates, as I also have Profit Alerts on three trades. I could also have a New Trade(s) or additional action to take into the close so stay locked-and-loaded!

Author

Dave Tony