[HRL in Wikipedia]
HRL
I shall use the JUN series of options, which trades for the last time 31 days hence, on June 18.
Ranges
Implied volatility stands at 33%, which is 2.2 times the VIX, a measure of volatility of the S&P 500 index. HRL’s volatility stands in the 71st percentile of its most recent range. The price used for analysis was $39.26.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 43.08 | 46.89 | 40.36 |
| Lower | 35.44 | 31.63 | 38.16 |
| Gain/loss | ±$3.82 | ±$7.63 | ±$1.10 |
The Trade
HRL reached an all-time high on Feb. 16 and began a downward reversal. Whether it is a counter-trend correction or a new, longer-term downtrend is as yet unclear. Given the decades-long duration of the rise and the indisputable truth that no trend lasts forever, I'm leaning toward the new downtrend side of the question.
I'm contemplating an earnings play -- a shorter-term trade -- and so a rise is not out of the question.
After the peak HRL dropped a few dollars, moved sideways for more than a month, and then had a sharp drop from late March into mid-April before reversing back up in a retracement slightly above the 23.6% Fibonacci step.
Brokerages are extremely negative about HRL's prospects, collectively coming down with a negative 100% enthusiasm index. None of six analysts have issued a strong-buy recommendation.
Nonetheless, given the ambiguities of the chart, I shall attempt a direction neutral strategy to cover all eventualities within a defined range.
short the $35 puts and long the $32.50 puts,
sold for a credit and expiring June 19.
Probability of expiring out-of-the-money
| JUN | Strike | OTM |
|---|---|---|
| Upper | 35 | 84.1% |
| Lower | 42.5 | 82.6% |
The premium is $0.45, which is 18% of the width of the position’s wings.
The risk/reward ratio is 4.6:1.
The zone of profit in the proposed trade covers a $3.25 move either way. The biggest immediate move after each of the past four earnings announcements was $2.94, and the average was $1.38. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.10.
Decision for My Account
The structure of the options grid severely limits choice of strike price, resulting in a large 4.6:1 risk/reward ratio. Since I limit the size of my trade based on risk, a high ratio means that there is insufficient reward to make the trade worthwhile.
So it is with HRL.
I am passing on the trade and won't be revisiting HRL prior to tomorrow's publication of earnings.
-- Tim Bovee, Portland, Oregon, May 17, 2016
References
Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner 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.
Alerts
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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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