Friday, 18 March 2016

More on Student Transportation - Technical Trade

Quick follow up post on STB.  I often attempt to marry up fundamental analysis with trading ideas.

Here's a better look at the common shares since Feb 11th.  The scale of the move is actually ridiculous, and demonstrates just how yield hungry participants are, but at what cost?  The common hasn't been more overbought technically at any time over the last 1.5 years, and has virtually erased the entire 9 month move down since the last treasury offering in less than 3 weeks.  It's rallied all the way back up to previous support at around $6.80 / $7.00

Here's my hypothesis.  Management aren't stupid.  They've enjoyed a near 60% move in the span of a month off the February lows.  Now, if they're really smart, they'll take advantage of participant euphoria to do a secondary or treasury offering while price is high.  By my estimates, free cash flows are insufficient to cover the ongoing dividends (per my previous post).

So my play:

Bought to open, 5 Oct $5 puts at $.15

Bought to open, 3 July $6 puts @ $.25

Total capital at risk in my play account, $150

Stop-loss?  There is none.  I'm looking for a full retracement back to $5 within 6 months.  This is my m.o. in my play account.  Put on improbable sounding trades.  It's not that I know that $6.80/$7.00 is resistance. By all rights, the stock could blow right through previous resistance and retest the previous highs at $7.40. Entirely possible.  But is this a probable scenario?

Let's assume I'm a fool (fair assumption), and I'm flipping a coin.  I have 50/50 odds of the trade working. My risk on the trade is my premium.  -$150.

My possible reward on the trade, assuming the euphoria wears off, participants come to their senses, or some other unexpected event or set of events occurs (i.e., secondary offering)?

On a move to $5.50 (50/200 MA reconnect within 2-3 months), $.70 x 3 on the July $6's, and $.35 x 5 on the Oct $5's = +$210 + $175 = $385

Reward: Risk = 2.6 : 1

Now, let's assume my odds are better than 50/50.  When is the optimal time to put on an improbable sounding trade?  I'd offer after a 60% move off the lows, and with the Globe and Mail validating the move recommending that investors accumulate the stock at these levels.  So that's what I've done.

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