Booking Massive Gains in Spreadtrum — And a Quick Intro to Trading Options

Q4 revenue rose almost 200% at $127 million, beating the average $122-million estimate. Profit of 62 cents per share was ten cents better than expected. For the current quarter, the company sees revenue in a range of $130 million to $135 million, beating the average $109-million estimate.

All in all, it was a blowout quarter…

As I am writing this before the market opens, I don’t know how much your remaining options will trade up. But I do know that with option volatility being a big chunk of the value of options, it’s going to be a huge day — and you should sell your remaining Spreadtrum options to lock in your gains.

We’ll probably be getting back into some new options once the stock settles down.

A Special Note on Trading Options

I also wanted to send you a special note about trading options…

As you have noticed, options are volatile — and moves of 20% to 60% on days like yesterday are not unusual. Spreadtrum options today could double easily. On the flipside, options can also fall back sharply, say, as Sina.com options did this past week. (By the way, China’s biggest bank just put a target price of $200 on the stock — and it’s trading just under $80.)

How best to deal with this volatility?

First, start small. Don’t ever let any single position get so big that you loose sleep over it. Start with as little as a single contract — and see how you react. Don’t worry about missing out. There are always new opportunities in the market.

Second, understand that the more life that an option has left, the better chance you have of making a profit. So the fact that Sina pulled back sharply last week means little. After all, the options expire in June — giving you plenty of opportunity to make money.

Third, volatility is your friend. With options, the more a stock (and the underlying options) bounce around, the more chance you have to make money.

Fourth, understand that I am monitoring options for you on a daily basis. I am keenly aware of which are winners and losers — and spend as much time trying to minimize your potential losses as I do in timing the exits. Monday’s exit from SVM options was a good example. The stock was a nice gainer, but because the options were about to expire, the options only broke even. Ironically, given that SVM had to come back 45% since late January, this was also one of your best-timed trades ever.

Finally, remember what Yogi Berra said he loved about baseball. You could get a hit only three out of 10 times (for a .333 batting average) and still make it into the Hall of Fame. My batting average is higher than that, but I don’t bat .100 either. So you are going to have losing trades. Such is life — and trading. That’s also why it’s crucial that you never bet “the farm” on any single trade — no matter how terrific it looks on Day One.