TSLA shares rose by 3.9% over 10 days, or a 142.5% annual rate. The options position produced a 100% yield on debt, for a 3,650% annual rate.
WFM shares rose by 8.9% over 10 days, or a 323.2% annual rate. The options position produced a 100% yield on debt, for a 3,650% annual rate.
Update 2/15/2015: BIDU gapped downward sharply after earnings were announced but remained, just barely, within the zone of profitability. I closed the position rather than risk losses if the price fell further.
The share price declined by -4.7% over the day I held the positon, or an annual rate of -1,730%.
The options making up my position produced a 4.6% yield on debit, for a 1,659% annual rate.
This is going to be fun.
I have an unusually heavy number of potential trades keyed to earnings announcements after the closing bell today. Also, I have an appointment I must keep this morning, which will reduce my analysis time to a minimum
I could arbitrarily reduce the possible trades to a more manageable size. But that would be cheating.
Instead, I'm going to do the trading equivalent of speed-dating: Evaluating the trades as quickly as possible, without a detailed mark-up of charts or info about the companies or the other things that I do to help me get a better feel for the trade.
These analyses will use the rating for direction guidance, and implied volatility, the ranges and the trade.
That's it. If I can make the trade work, then I'll make the trade. It will be interesting to see if the quick-and-dirty method produces better results than the more thoughtful approach.
There are five companies in the mix. Sorted by the Zacks Investment Research rating, they are:
- Zacks Bullish: Tesla (TSLA), Whole Foods Market (WFM)
- Zacks Neutral: Bidu (BIDU), Cisco Systems (CSCO), Applied Materials (AMAT)
To simplify the trades, my goal in all five cases will be to construct iron condors wide enough to cover the one standard deviation range or the chart range, whichever is wider.
The FEB series trades for the last time on Feb. 20, nine days hence.
BIDU
Volatility
Implied volatility stands at 37%, in the 79th percentile of the previous rise.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 234.67 | 245.17 | 221.52 |
| Lower | 206.57 | 193.71 | 210.85 |
| Gain/loss | 5.9% | 11.7% |
The Trade
short the $205 puts and long the $200 puts
sold for a credit and expiring Feb. 21
Probability of expiring out-of-the-money
| FEB | Strike | % |
|---|---|---|
| Upper | 235 | 85 |
| Lower | 200 | 84 |
The risk/reward ratio stands at 11:5.
TSLA
Volatility
Implied volatility stands at 56%, at the 100th percentile of the previous rise.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 235.42 | 254.56 | 225.48 |
| Lower | 197.16 | 178.02 | 211.99 |
| Gain/loss | 8.9% | 17.7% |
The Trade
short the $195 puts and long the $190 puts
sold for a credit and expiring Feb. 21
Probability of expiring out-of-the-money
| FEB | Strike | % |
|---|---|---|
| Upper | 235 | 85 |
| Lower | 195 | 70 |
The risk/reward ratio stands at 8:5.
WFM
Volatility
Implied volatility stands at 42%, in the 100th percentile of the previous rise.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 56.53 | 60.07 | 54.48 |
| Lower | 49.47 | 45.93 | 51.52 |
| Gain/loss | 6.7% | 13.3% |
The Trade
short the $00 puts and long the $00 puts
sold for a credit and expiring Feb. 21
Probability of expiring out-of-the-money
| FEB | Strike | % |
|---|---|---|
| Upper | 57.5 | 82 |
| Lower | 51 | 65 |
The risk/reward ratio stands at 6:5.
CSCO
Volatility
Implied volatility stands at 28%, in the 77thpercentile of the previous rise.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 28.67 | 29.90 | 27.66 |
| Lower | 26.21 | 24.98 | 25.92 |
| Gain/loss | 4.5% | 9.0% |
The Trade
short the $25 puts and long the $24 puts
sold for a credit and expiring Feb. 21
Probability of expiring out-of-the-money
| FEB | Strike | % |
|---|---|---|
| Upper | 30 | 94 |
| Lower | 25 | 24 |
The risk/reward ratio stands at 5:1. And that's quite high. However, the trade as structured above is the best way to put the entirety of the one standard deviation range within the zone of maximum profit.
AMAT
Volatility
Implied volatility stands at 45%, in the 82bd percentile of the previous rise.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 25.74 | 27.43 | 24.67 |
| Lower | 22.36 | 20.67 | 22.39 |
| Gain/loss | 6.9% | 3.8% |
The Trade
short the $22 puts and long the $21 puts
sold for a credit and expiring Feb. 21
Probability of expiring out-of-the-money
| FEB | Strike | % |
|---|---|---|
| Upper | 26 | 85 |
| Lower | 22 | 21 |
The risk/reward ratio stands at 5:1, which is high, as with CSCO. This play is the best way to place the entirety of the one standard deviation range within the zone of maximum profit.
Decision for My Account
I've opened positions on BIDU, TSLA and WFM, as described above, and I've passed on trading CSCO and AMAT because there is no way to place the entire one standard deviation range in each within the zone of maximum profit without incurring overly large risk/reward ratios.
At that's it: Five stocks analyzed and three positions opened in 45 minutes. Speed-dating indeed.
-- Tim Bovee, Portland, Oregon, Feb. 11, 2015
References
My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".
The directional score is calculated as the sum of the following:
- Zacks rating --The Zacks ratings are translated as follows: 1=2, 2=1, 3=0, 4=-1 and 5=-2.
- Enthusiasm rating --: A single percentage derived from the number of analysts whose opinions are in one of five categories: Strong buy, buy, hold, sell and strong sell.
- Strong buy share -- The percentage of all analysts who rank the stock strong buy. If the share is 60% or greater, the score is 1; if 40% or less, then the score is -1; otherwise, the score is zero.
- Enthusiasm momentum -- The score is 1 if today’s enthusiasm rating is larger than the rating 30 days earlier; otherwise, the score is zero.
- 30-day direction -- The trend that best describes the 30-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
- One-day direction -- The trend that best describes the one-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
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.
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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 decisions for his or her own account, and take responsibility for the consequences.License
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
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