Tuesday, November 6, 2012

JBL: Decisions, decisions

A tough day for trading decisions. I got four breakouts in short order this morning, and because of my limit of two new stock/option positions each day, I had to do triage to pick my trade.

So, how to choose?

The original Turtle Trading system, upon which my trading rules are based, uses a strict time-order method. If you get a signal at 9:30 a.m., and another at 9:45 a.m., then the 9:30 a.m. position will be opened first. No questions. No thought.

But the Turtles were trading in the limited world of futures. Stocks and their options are quite a bit more numerous and have a lot more moving parts.

So I make a conscious choice rather than just relying on first come first traded.

The signals were on GS, AMTD, JBL and PAY. How to choose?

Rather than having strict rules for selecting, I tend to operate within a spectrum of tendencies. I tend to like higher volume over lower volume.

I prefer stocks whose breakouts are in the direction of the company's fundamentals and analyst opinions. I follow Zacks for this assessment. If a stock breaks out to the upside but is rated "strong sell" by Zacks, then I'm less interested.

On the chart, as I discussed on Monday, I'm looking for breakouts that are really moving beyond support or resistance, rather than simply crossing an arbitrary 20-day-high level. I may move a break-out level in order to achieve that end, thereby killing any immediate trade.

I prefer stocks whose options have strike prices at $1 intervals. Options with low open interest are deal killers, as are those whose options are so expensive they would put my exposure beyond what my rules allow.

Some fell based on illiquid options and one, GS, because the price is high.

The survivor of all of this assessing was Jabil Circuit Inc. (JBL), which on Tuesday broke above its 20-day high of $18.28.

Now, the stock has a very bearish analytical rating from Zacks, but its earnings in late September beat analysts' expecations by 8%, so I'm discounting the contradiction somewhat. (This is what I mean by "tendencies"; things aren't hard and fast, but rather its a "yes but no or maybe" sort of inner dialogue.)

The stock on Oct. 15 hit a swing low of $16.82, ending a decline from $23.95 in late August. From there the price rose for two days, retraced almost the entire rise, and then on Oct. 23 began an near-term uptrend from $16.84 that is still happening.

It's not that analysts hate JBL, which, from its St. Peterburg, Florida headquarters, directs the manufacture of electronics for big enterprises and their products, such as aerospace, automotive, defense, medical, solar and networking industries.

They give it a 27% enthusiasm index -- not bad -- although it's down from 60% two months ago.

And the return on equity is excellent, at 21%, although that's down from 23% the prior quarter. The long-term debt is a bit high, at 79% of equity.

The company had big changes at the top last month. A big customer, Research-in-Motion, has had problems for awhile. It's not that JBL is awful, but for some it just sort of gives off a nervous-making vibe in the eyes of some.

So who do I believe? The chart or the experts?

In truth, I think Zacks has gone too far with its bearish rating. The financials to me seem better than that. But their analysis goes far deeper than mine, so I have little standing to disagree with them.

If indeed their forecast, covering the next one to three months, is correct, then JBL will present a useful stress test to my system of structuring and exiting trades.

Quarterly earnings have been on a plateau since 2011, although the company has been consistently profitable.

Institutions own 84% of shares, and the price is in the cellar; it takes only 22 cents in shares to control a dollar in sales.

JBL on average trades 3.2 million shares a day. It has a wide selection of option strike prices, with open interest running to the three- and four-figures. The front-month at-the-money bid/ask spread is 4%.

Implied volatility stands at 38% in a six-month range running from 31% to 52%. It has been working its way higher since mid-October.

Options are pricing in confidence that 68.2% of trades will occur from $16.48 and $20.48 over the next month, for a potential profit or loss of 11%, and from $17.52 to $19.44 over the next week, for a 5% profit/loss.

JBL's options are in the doldrums today, with calls at 89% of their five-day average volume and puts at 28%.

The fair-price zone on today's 30-minute chart runs from $18.19 to $18.49, encompassing 68.2% of transactions surrounding the most-traded price, $18.43. With 90 minutes worth of trading left, the price is near the top of the zone.

Jabil Circuit next publishes earnings on Dec. 19. It goes ex-dividend on Nov. 13 for a quarterly payout yielding 1.73% annualized at today's price.

Decision for my account: I took the trade despite the bad rating from Zacks, for the reasons discussed above. I structured the position as a December bull put vertical spread, short the $18 strike and long the $17, for a 25% yield on risk. This structure places the break-even point, $17.66, near my stop/loss level of  $17.38. (The stop/loss is double the average daily trading range.)

I don't place actual stop/loss orders on vertical spreads, instead relying on the spread structure to limit my losses (and also gains). If the price continues to rise and triggers me to add to the position, the additions will be in the form of long March call options.

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 decision decisions for his or her own account, and take responsibility for the consequences.

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