• Hot Stove Analysis

Do you remember your Trade of the Day from April 17?

I was skeptical about a “lone wolf” buyer of Lam Research Corporation (Nasdaq: LRCX) puts.

Here’s a quick refresher…

Does somebody know something about Lam Research Corporation that’ll send the shares lower by April 26?

The reason I ask is because last Friday, around 1:30 in the afternoon, someone stepped in and paid $500,000 for 500 of the Lam Research April $200 puts (the weekly series expiring April 26). These puts were bought on the ask for $10 when the stock was trading for $194.10. Could this be a directional earnings play?

This appears to be a lone wolf trader playing the odds that Lam Research won’t be able to move up four earnings reactions in a row. Maybe they’ll be right – and maybe they’ll be wrong. But to my eye, unless they have some sort of insider information, this looks like a 50-50 proposition.

Now let’s fast-forward to last week…

As it turns out, my skepticism about this put trade was right.

Look at this chart and you’ll see that Lam Research moved aggressively higher in reaction to earnings. As a result, our so-called lone wolf got crushed.

As of last Friday, these puts (which were purchased for $10) were trading midday for $0 (no bid) to $0.03. Not only that, but more than 500 contracts traded last Friday.

Now, I cannot guarantee these were the same 500 puts that this buyer bought for $10. But there’s a very good chance this was indeed the case.

If so, that’s how to lose half a million dollars in eight days!

Action Plan: As a trader, I know better than to go against the most powerful adage in all of trading, “The trend is your friend.” I outlined for you, in real time, just what happens when someone tries to swim upstream against this metric – and the result speaks for itself. Always recognize and respect the trend, no matter how logical your rationale is for going against it.

Let’s learn from the mistakes of others – because being half a million dollars poorer in eight days is no fun!