| pps | psar | macd | obv | h-a trend | ma20 | ma50 | ma200 | |||
|---|---|---|---|---|---|---|---|---|---|---|
| GES $41.03 |
The GES chart is on the wishy-washy side. It is in bull phase on my three principal signalers, but the on-blance volume has been trending more or less sideways, as has the price since mid-September, and the price is barely above the 20-day moving average.
It's an OK chart, but nothing to get excited about.
The financials are excellent: A return on equity of 27%, 78% institutional ownership and a debt to equity ration of 0.01%. Revenues have risen each year beginning in 2008, and the trailing-12-months quarterly results point to another revenue rise when 2010 results are known.
But at this point, for GES, it's not about the chart and it's not about the fundamentals. It's all about the surprise.
GES has produced an earnings surprise every quarter the past two years, averaging 11¢ each quarter. Up until March each announcement produced a price increase.
However, the May 27 and Aug. 25 announcement resulted in price declines. Perhaps it is because the magnitude of the surprise declined in those months, to 5¢ and 3¢, respectively.
Several analysts downgraded the stock in late October.
On the Person's daily chart, the stock is trading at the weekly midpoint.
Person's Table
| pps | pps open | upper pivot | lower pivot | |
|---|---|---|---|---|
| GES $41.03 | $40.31 nov4 | $43.10 +5.1% | $40.11 -2.2% |
The stock has been trading slightly down the last five days after hitting a lower high on Nov. 9.
Reversal Levels
- $43.47, +6.0% (swing high)
- $42.31, +3.1% (lower high)
- $41.03 --- You are here.
- $40.76, -0.7% (20-day moving average)
- $38.20, -6.9% (swing low)
So, how should this be played? As always, I want to hedge with options, and therein lies a problem.
GES is one of those stocks that has strike prices $5 apart, which makes it harder to construct complex option positions, such as vertical spreads, that provide me with an acceptable level of risk.
The Bollinger bands on the stock have been ticking along with very little variance in their distance apart. So it's a tossup whether to go with selling a bull put spread (high and falling volatility) or buying a bull call spread (best in low and rising volatility).
So, I'll look at both.
Bull call credit spread:
Some say a bull call spread should be four to eight weeks out from expiration. Other's say six months is best.
Looking first at the nearer term, I buy a DEC $40 call, as close to at the money as I can manage, and sell a DEC $45 call. This gives me maximum profit per contract of $307, with a maximum loss of $193, with a break-even of $41.95. Time decay on the position is neutral at this point: I lose $3 per day on the DEC $40 call, but gain the same amount on the DEC $45 calls. As a credit spread, I pay for the options and get money back later (if the stock rises).
For the farther term, I buy a JUN $40 call and sell a JUN $45 call, giving me max profit of $280 per contract and max loss of $220, with a break-even of $42.20. Time decay is also neutral, as is to be expected that far out.
A third way would be to do the near-term but lower the break-even, by buying the DEC $35 call and selling the DEC $40 call, for maximum profit of $125 and maximum loss of $375. The braek-even is $38.75, well below support.
Bull put spread: I position structure under the 20-day moving average support level, which is also under the lower pivot level on the Person's chart. So, I sell the DEC $40 put and buy the DEC $35 put. This gives me maximum profit of $137 per contract, and maximum loss of $363. Time decay works in my favor: Each day I gain $3 per contract on the DEC $40 put but lose $2 per contract on the DEC $35 put, for a net gain of $1 per day.
Let's compare the choices, using risk and reward.
A. For the near-term 40/45 bull call spread: For every dollar risked, I have the potential of earning a $1.60 reward. So, the ratio is 1:1.6
B. The far-term 40/45 bull call spread: 1:1.3
C. The near-term 35/40 bull call spread: 1:0.3
D. The bull put spread: 1:0.4.
So, it comes down to choice A or choice D, depending upon what I think volatility will do.
Beginning Oct. 11, there was a slight narrowing of the Bollinger bands, suggestion that at last minimally volatility is declining. That argues for choice D, the bull put spread.
If I play it as a vertical spread, that's what I'll use as my vehicle.
There's another possibility: Simply buying shares or buying a call.
Buying shares, of course, costs more than $4,100 per 100 shares, with infinite potential reward and total loss of the entire amount.
A JUN $35 call option can be bought for $970 and controls 100 shares. It has a maximum loss of $970 and infinite potential gain. True, it loses $1 per day to time decay, but that's a small price to pay for a short-term position. However, it has a break-even stock price of $44.70, which is pretty high. Basically, it's a one-sided bet, not a hedge.
Bottom line: I would be willing to take this trade on my own account using a bull put spread and resolving to close at the first sign of price weakness after earnings are announced.
I like the GES financials, and the chart, despite its weaknesses, is something I can live with. I'm troubled by traders' tendency to ignore upside earnings surprises and cause the price to decline after the announcement. I dislike the options structure, and I may decide that that's a deal-killer for me.
Disclaimer
Tim Bovee, Private Trader tracks the 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.
Abbreviations:
- h-a trend - Heikin-Ashi trend.
- obv - On-Balance Volume.
- pps - Person's Proprietary Signal.
- psar - Parabolic Stop and Reverse
- ma20 - 20-day moving average
- ma50 - 50-day moving average
- ma200 - 200-day moving average
- macd - Moving Average Convergence-Divergence
About the glance: The colors indicate the state of each signal.
- Signal Section:
- pps, psar, macd: green for bull mode, red for bear.
- Confirmation Section:
- obv: green for uptrending, red for downtrending.
- h-a trend: green for uptrending, red for downtrending.
- Environment Section:
- ma20, ma50, ma200: green for above the average, red for below the average.
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