During the 81 days I held a bear position in NTAP, the stock declined by 3.3%, or 15.1% annualized.
My options positions earned a 166.7% yield on risk, or a 29.4% yield on debits.
Update 3/7/2014: I've opened a bear position in NTAP, structuring it as a bear put options spread, long the $40 put and short the $38 put, bought with a debit and expiring in June. The long leg has a 68% chance of expiring in the money, for maximum profit.
NetApp Inc. (NTAP) reversed from a peak of $45.96 in late January, marking a lower high in a stair-step downwards that began from $61.02 in in February 2011. The decline from January crossed the lower boundary of the 20-day price channel at $39.65, triggering a bull signal.
Further decline in trading today carried NTAP below a support level at $38.34, clearing the way for further movement to the downside
The Chart
In Elliott wave analysis, the decline below $38.34 confirms that wave A {+2} to the upside indeed ended on Jan. 23 at $45.96.
The $38.34 level was the starting point of the final leg up of wave A {+2}. Before that level was beached, the possibility remained that the final leg, wave 5 {+1} was extending its rise.
Click on chart to enlarge.
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| NTAP 4 years 2-day bars (left), 60 days hourly bars (right) |
The decline that followed has been the working out of the third and final declining wave, C {+4}.
My count places NTAP in wave 3 {-1} of 3 of A {+1} of B {+2} of 2 {+3} of C {+4}.
At the {+3} degree, we're looking at a 2nd wave upward correction from November 2012, so wave 2 {+3} cannot move below its starting point at $26.26.
Odds and Yields
NTAP has been an uptrend for so long that it has little in the record to recommend it as a ber play.
This is the first bear signal since wave B {+2} began. NTAP has completed 13 bear signals since wave C {+4} began in February 2011.
Five were successful, on average yielding 10% over 33 days. The eight unsuccessful trades lost 6% over 17 days on average.
That is to say, NTAP is prone to whipsaws. This is offset somewhat by a positive win/lose yield spread of 4%.
The Company
NetApp Inc., headquartered in Sunnyvale, California, provides high end data storage and management systems for high-end corporate applications.
Hardware accounts for more than a third of its market cap, and another third is divided equally between software and support/consulting services.
Analysts collectively come down with a negative 36% enthusiasm rating, a pessimism not supported by the companies key numbers: Return on equity of a respectable 17% and debt amounting to only 25% of equity.
Earnings each quarter of 2013 came in above its year-ago counterpart. The company has surprised to the upside the last eight quarters.
The earnings yield is 4.56%. The company pays a dividend with an annual yield at today's prices of 1.58%, or 35% of the earnings. NetApp's earnings yield is less than 89% of other computer storage device companies.
NetApp next publishes earnings on May 21 and goes ex-dividend on April 8 for a 15 cent quarterly payout.
Liquidity and Volatility
NTAP on average trades 4.1 million shares a day and supports a wide selection of option strike prices spaced a dollar apart with open interest running to three figures near the money. The front-month at-the-money bid/ask spread on puts is 1.5%, compared to 0.6% for the S&P 500 fund SPY.
Implied volatility stands at 27%, compared to 15% for SPY, and has been tracking sideways since mid-February.
Implied volatility is at the 25% and is 2% below historical volatility, suggesting that long option spreads sold for credit would have the better chance of success.
Options are pricing in confidence that 68.2% of trades will fall between $34.94 and $40.86 over the next month, for a potential gain or loss of 7.8%, and between $36.38 and $39.32 over the next week.
Contracts are trading slowly today, with puts at 81% of their five-day average volume and calls at 66%.
Decision for My Account
I intend to open a bear position in NTAP if downside momentum continues in the last half hour of trading. I'll structure the position as bear put spreads, bought for a debit and expiring in June.
If momentum falters, then I'll add NTAP to my Watchlist for further consideration.
References
My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.
See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
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