Tuesday, May 21, 2013

WY: Smokey the Bull

Update 6/16/2013: I've done a post-mortem on this position, "Anatomy of a failed trade".

Update 6/14/2013: In my entry analysis, below, I mentioned Smokey the Bear. I would have done better to have heeded the warning of The Teddy Bears' Picnic: "If you down to the woods today, you're sure of a big surprise."

I've exited WY with five trading days left before expiration. The price peaked on May 22 at $33.34, then dropped, falling below the 10-day price channel at $31.38. My exit point was around $28.34.

The price of the stock fell by 12.9% during the time I held the position. I added to the position once during that period, and the loss calculated from my basis is 13.7%.

I structured the position as net short vertical option spreads, providing both leverage and a hedge. The hedge was insufficient, given the magnitude of the move, and the leverage magnified my loss, which for the options was 64.1%.


Weyerhaeuser Co. (WY), in sending a bull signal, continues its leg up from $18.70 in June 2012 and today hit a swing high of $32.67, just pennies below its 20-year high of $32.75 set in February 2007.

It's a position of opportunity and caution, opportunity because breaking above major resistance typically means a strong continuation of an uptrend, caution because major resistance has an inconvenient tendency to stop uptrends in their tracks.

WY hit a post recession of $7.02 in March 2009 and remains in an uptrend that continues that recovery. However, it is in a downtrend that began from around $86 in February 2007, before the recession knocked over many houses of cards.

I'm a mid- to short-term trader, so I consider WY to be in an uptrend, but contrary views are just as valid.

Nearer term the stock has been trading in a sideways channel since January and with recent moves has broken above the channel ceiling of around $31.75 to $32.

This is WY's fourth bull signal since the present uptrend began. Two the of three completed signals were successful, for an average profit of 16.2%, compared to a 5.2% loss on the unsuccessful trade. The resulting 11% win/lose yield spread is acceptable, although not spectacular.

WY is among four symbols that survived my second-wave analysis from among the 10 symbols identified from my initial screening. (See "Tuesday's Prospects" for details.)

Six symbols, including the big name of the batch, FB, moved back within their 20-day price channels and so failed confirmation. The others are ACAD, HERO, MPC, QUAD and TV. The three other confirmed symbols --  COG, IMAX and TUP -- had odds that are worse than I like, leaving WY as the sole survivor.

Weyerhaeuser, headerquartered in the Seattle suburb of Federal Way, Washington, is a lumber company operating in 11 countries and managing 20.3 million acres of forest.

When I think forests, I think of Smokey, the U.S. Forest Service's iconic symbol in its campaigns against forest fires. With this chart, though, it's more Smokey the Bull than Smokey the Bear.

It wasn't always so.

The lumber industry was hit hard by the collapse of the housing market in the United States and many other countries, so it is perhaps understandable to see analysts harboring a high degree of bad vibes toward WY, giving it a negative 60% enthusiasm index.

The company reports return on equity of 11% and a higher-than-I-like level of debt, amounting to 92% of equity. These are not high growth numbers by any means.

Weyerhaeuser has been profitable in the past 12 quarters and since the 1st quarter of 2012 has seen a steady uptrend in profits. The company has surprised nine times to the upside in that period, and three times to the downside.

Institutions own 77% of shares, and the price -- contrary to the bad vibes of the analysts -- has been bid up quite a bit. It takes $2.36 in shares to control a dollar in sales.

WY on average trades 4.3 million sahres a day and supports a moderate selection of option strike prices with open interest running to three and four figures. The front-month at-the-money bid/ask spread on calls is 4.6%.

Implied volatility stands at 24%, just below the six-month mid-point. It has been trending sideways since late April.

Options are pricing in confidence that 68.2% of trades will fall between $30.23 and $34.77 over the next month, for a potential gain or loss of 7%, and between $31.41 and $33.59 over the next week. This is a fairly narrow range and could limit opportunities for constructing profitable option sreads.

Put options are trading 3% above their five-month average volume, while calls are at only 30% of average. Sometimes on a breakout option volume rises to a speculative pitch. Not WY.

The fair-price zone on today's 30-minute chart runs from $32.31 to $32.53, encompassing 68.2% of transactions surrounding the most-traded price, $32.49. After moving above the zone early on, WY dropped below the zone in the third half hour and, with two hours plus change left before the closing bell, has moved to the top of the zone.

Weyerhaeuser next publishes earnings on July 25. The stock goes ex-dividend in august for a quarterly payout yielding 2.46% annualized at today's prices.

Decision for my account: I've opened a bull position in WY, structuring it as a vertical credit spread expiring in June, short the $32 put and long the $30 put. The somewhat low volatility made it a bit tricky to put together a spread that with sufficient potential profit to overcome the risk. This spread has maximum potential yield at expiratoin of 16.7% and provides a 2.8% cushion of profit below the entry price.

Bottom line: A ho-hum trade, probably, but nothing to hate.


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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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