My position is an iron condor (p28/-p31/-c34/c36), profitable if at expiration the price of the stock is between the strike price of the short put, $31, and the strike of the short call, $34.
Shares are trading at this moment at $31.61, and falling.
The last trading day before expiration is Feb. 19. CVS's earnings will be released before the market opens on next Monday, Feb. 8.
If the position is within the maximum profit range $31-$34 at expiration, I'll make 90 cents profit. If I close now, the profit will be about a third of that.
What's a trader to do?
The decline came after CVS major competitor, WAG, reported a 1.1% decline in same-store sales in January, and another competitor, RAD, a 2.2% decline. CVS has not released it's same-store sales numbers. There've also been some negative ratings the last few weeks from analysts. CVS has been in bear mode on the macd for 10 days, and went back into bear mode on the Persons's Proprietrary Signal today, two days after the pps gave a bull signal. The stochastic is slightly above the 20-line and has turned back toward it, indicating an oversold condition. |
The 20-day moving average is trending sideways above the price and above the ma200. The ma50 is below both.
The money flow index (mfi) is heading down toward the 20-line, indicating the shares are turning oversold, but aren't there yet.
The average true range over 14 days is 72 cents, and that decline has exceeded that by about 8 cents (as of 11:55 a.m. Eastern).
The decline puts the price at support in an area of congestion that heled ssway from November to December.
So this is a bearish picture, all in all. When I set up the iron condor, I picked 31 as my lower level because of the congestion. Dropping down the 30, a safer move, would have sucked away the premium. So the 31-cent level is about midway through the congestion and corresonds with a high set on Nov. 9.
This is a classic "O my daughter! O my ducats!" sort of dilemma. I really like the idea of tripling my profits by waiting 14 days. On the other hand, an earnings surprise could throw me into the loss category.
Looking at a very short term chart, the low today of $31.62 was set at 11:39 a.m. Eastern, and that's where the price stands now, 17 minutes later. My best guess is that little will happen until traders make decisions in the last half hour of the day.
Although maximum profit is $31 and above, the position will show some profit at expiration down to about $30.28. The loss exceeds $20 per contract only at around $29.55.
The amount of loss that I'm willing to take is about $100, frankly. I don't want to lose more. So that means I can ride the position down to $29.55 or so before I hit that level ($20 per contract, and I hold 5 contracts).
That means I'm not taking too painful a loss if the stock falls another 6.5%. I'm profitable, to an extent, with a decline of 4.4%, and I'm fully profitable with a decline of 2%.
On Nov. 4 CVS gapped down 21% on a bad earnings report. My hunch is that the company is unlikely to do that twice in a row.
WAG's shares have declined about 7% in two days, as a result of the same-store sales numbers. RAD has actually barely declined at all.
All in all, I'm willing to hold the position into Friday, and look at it again. If shares continue a steep decline, then it's time to close the position. If they rebound or trade sideways, then I'll conclude that the bad news has been factored in, and I'm unlikely to see a gap down on Monday.
New to private trading? Here's a look at How to Become a Private Trader.
Topics:
CVS Caremark, pharmacies, drugs, Rite Aid, Walgreen.
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