AMAT Analysis

The manufacturer of semiconductors and other computing components Applied Materials Inc. (AMAT), headquartered in Santa Clara, California, publishes earnings on Thursday after the closing bell.

[AMAT in Wikipedia]

AMAT

I shall use the JAN series of options, which trades for the last time 64 days hence, on Jan. 20.

Ranges

Implied volatility stands at 39%, which is three times the VIX, a measure of volatility of the S&P 500 index. AMAT’s volatility stands in the 59th percentile of its annual range. The price used for analysis was $30.36.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	35.35	40.33	32.05
Lower	25.37	20.39	28.88
Gain/loss	±$4.99	±$9.97	±$1.59

Implied volatility 1 and 2 standard deviations; central tendency earns move
The Trade

After more than a decade of price stagnation following the crash of the Dot-com Bubble in 2000, AMAT in 2013 began a climb to a post crash high that so far has peaked on Sept. 21 and then entered a period of correction.

In Elliott wave terms, it is now in the second wave -- and upward movement -- of a Flat. It remains below the September peak. The correction covers a range from $28 to $31.

Chart Patterns: After the Buy by Thomas N. Bulkowski

Zacks Investment Research gives AMAT a bullish rating but with no indication of a looming earnings surprise.

Brokerages on balance give AMAT a 61% enthusiasm rating, with 78% of 18 analysts issuing strong buy recommendations.

AMAT's price has risen immediately after all of the last four earnings announcements.

Based on the sideways chart pattern and the lack of an earnings surprise indicator, I shall attempt a direction neutral structure, expanding the profit zone to the upside as possible.

Iron condor, short the $34 calls and long the $35 calls,
short the $28 puts and long the $27 puts,
sold for a credit and expiring Jan. 21.
Probability of expiring out-of-the-money

JAN	Strike	OTM
Upper	34	83.2%
Lower	28	70.1%

The premium is $0.33, which is 33% of the width of the position’s wings.

The risk/reward ratio is 2:1.

The zone of profit in the proposed trade covers a $3 move either way. The biggest immediate move after each of the past four earnings announcements was $2.94, and the average was $1.71. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.59.

Decision for My Account

I have entered a position on AMAT as described above. The stock at the time of entry was priced at $30.59.

-- Tim Bovee, Portland, Oregon, Nov. 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. 

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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.