The stock hit its high during my holding period on April 10, when it rose to $37.90. The price fell in each of the ensuing three days. STX next publishes earnings on May 1.
The underlying shares lost 4% during the period I held the position. I closed the spreads for a 2.7% loss on risk.
Seagate Technology PLC (STX) broke above its 20-day price channel on Wednesday and continued to rise today. The bull signal is part of a broad uptrend that has stairstepped from $9.05 in October 2011 up to $37.94 on Jan. 23.
The price corrected downward beginning in January, to a higher low of $30.26 that kept the uptrend intact. Continuation of the uptrend will be confirmed once the price moves above the $37.94 level.
Since the broad markets began their post-recession recovery in early 2009, STX has broken above the 20-day price channel 16 times. Nine of the breakouts produced a profit, with an extremely high average return of 27.3%. Adjusting the return by the 56.3% success rate produces a score of 15.3%, more than triple my 5% minimum preference.
The analysis shows STX to be a stock that has both high odds of success and big rewards when it succeeds.
Since the present uptrend began in October 2011, STX has sent six bear signals, five of them profitable, with an average return of 22.4%.
Seagate, managed out of Cupertino, California, makes data storage products, both traditional hard drives and solid-state drives.
Analysts are anything but enamoured with STX. Their opinions collectively give the company a negative 70% enthusiasm index, down from a negative 50% two months ago.
It seems a poor return to a company that has seen its earnings more than quadruple in 2012 compared to the year before. The company has been profitable for at least the last 11 quarters but seems particularly prone to negative earnings surprises. STX has surprised to the down side six times in the last 11 quarters, and five times to the upside.
Seagate reports a ridiculously high return on equity, 99%, but with a heavy load of debt, amounting to 96% of equity.
Institutions own 77% of shares, and the price is cheap; it takes only 78 cents in shares to control a dollar in sales.
STX on average trades 5.3 million shares a day, sufficient to support a good selection of options strike prices with open interest running to the three- and four-figures. The front-month at-the-money bid/ask spread on calls is low, at 2.5%.
Open interest is running at 42%, just below the mid-point of the six-month range. It has been trending downward since late February but began what might be an uptrend on March 12.
In the following discussion I refer to 68.2% of trades. In statistics, one standard deviation refers to boundaries that encompass 68.2% of trades around a base price.
Options are pricing in confidence that 68.2% of trades over the next month will fall between $31.36 and $40.06, for a potential profit or loss of 12.2%, and between $33.62 and $37.80 over the next week.
Options trading today is running 61% above the five-day average volume for calls, as 12% above average for puts.
The fair-price zone on today's 30-minute chart runs from $35.56 to $35.81, encompassing 68.2% of trades surrounding the most-traded price, $35.69. STX is trading at the most-traded price after having traded above the zone in the first hour after the open, and within the zone thereafter, with three hours left in the trading day.
Seagate next publishes eranings on April 18. Dividends are uncertain. In December, it made a quarterly payout hyielding 4.26% annualized at today's prices, but issued a statement saying that the December payment was in place of the one due in March.
The directors added, "The payment of any future quarterly dividends will be at the discretion of the Board and will be dependent upon Seagate's financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the Board."
To me, that sounds like a long way of saying, "Don't hold your breath."
Decision for my account: I've opened an initial bull position in STX, structuring it as a bull put spread expiring in April, short the $34 put and long the $32 put. The position provides a 7% cushion of profit below the entry price and a potential yield of 19%. The risk/reward ratio is 3:1.
If the price continues to rise, I'll add to the position by buying long June calls with deltas as close to 70 as I can manage.
My trading rules can be read here. A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.
And the classic Turtle Trading rules on which my rules are based can be read here.
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.