Tuesday, July 2, 2013

SPLK: Spelunking the data

Update 8/15/2013: SPLK, since its options were closed on Aug. 9 near expiration at a small cost, has been awaiting an opportunity for a roll into a fresh position. That opportunity disappeared today as the stock gave a close signal.

I only held one position on SPLK -- it was never rolled. The share price rose by 7% during the 38 days I held the position. The options produced a 21.5% yield on risk.

Splunk Inc. (SPLK) broke above its 20-day price channel on Monday and confirmed the bull signal by trading still higher today, to an all-time high so far of $49.29. It went public in April last year and in its short chart history has been in an uptrend since November 2012.

This is SPLK's third bull signal of the uptrend. The two completed signals split, with the successful trade yielding 33.2% over 997 days, and the unsuccessful trade losing 7.9% over eight days. The resulting 25.3% win/lose yield spread is quite high.

There was an inordinately large number of potential trades to choose from today (see "Tuesday's Prospects" posted last night). I concentrated on the higher volume potentials, SPLK and MTU, both of which also had highest win/lose yield spreads of the batch. SPLK won because of its higher spread and better options grid, although MTU remains intriguing as a shares play. Not so much. The price has dropped below the breakout level, putting MTU in a non-confirming position. Maybe some other day.

Splunk's name is, I'm guessing, a play on "spelunk", the exploration of natural caves. Splunk's caves are big data, its analysis and management. It's specialty is dealing with unstructured data, the hodge-podge of detrius knocked lose by the machines as they conduct us through our daily lives. The company's software is used by 3,700 customers in 74 countries.

Big data has been very much in the headlines of late, thanks to Edward Snowden and his leak of NSA's methods of data acquisition, with much of the debate focusing on how awful it is that governments and companies collect so much information about us.

But like it or not, big data is with us to stay, and can no more be rolled back than can any other core technology. It is, with a nod to Anthony Trollope, the way we live now. There is money to be made, and SPLK is attempting to make it.

Although not, it appears, very successfully. The company has five quarters of earnings history since going public and in only one has it made any money. The rest have been unprofitable, with the most recent having the largest losses.

Return on equity is a negative 14%. On the good side, Splunk has no long-term debt.

And yet, analysts are bullish on the stock. In aggregate they give it a 38% enthusiasm rating. Splunk, after all, is operating in a relatively new marketplace, and a rapidly moving one, which means continual development costs. Analysts look to the future promise, not the past results.

Institutions own nearly all the shares, and the price has been bid up to an extraordinary level. It takes $22.62 in shares to control a dollar in sales.

SPLK on average trades 2.3 million shares a day and supports a moderate selection of option strike prices with open interest running to the three- and four-figure range.  The bid/ask spread on front-month at-the-money calls is 7.7%, a touch high but not unexpectedly so for a stock of SPLK's liquidity.

Implied volatility stands at 38%, near the bottom of the six-month range. It has been trending sideways for a month.

Options are pricing in confidence that 68.2 of trades will fall between $43.61 and $54.40 over the next month, for a potential gain or loss of 11%, and between $46.41 and $51.60 over the next week.

Option trading is tending toward puts, whose volume is double the five-day average, compared to 37% above average for calls.

The fair-price zone on today's 30-minute chart runs from $48.15 to $48.92, encompassing 68.2% of transactions surrounding the most-traded price, $48.59. The price opened near the most-traded prie, fell to the bottom of the zone and has since risen above the zone, where it stands with 2-1/2 hours left before the closing bell.

Splunk next publishes earnings on Aug. 26.

Decision for my account: There is no doubt that SPLK is a speculative play. The chart and odds analyses show that it has momentum to spare, but the financials aren't there to support it, not yet at least. And it doesn't have much chart history, always a negative.

Yet it's an optionable trade and so I can hedge the risk. And as a trend follower, I also give more credence to the chart than the books.

I've opened a bull position in SPLK, structuring it as short vertical options spreads expiring in August, short the $47.5 put and long the $45 put. The position is profitable at expiration down to 4.8%  below the entry price and has a maximum yield of 23.1%. The leverage is 2:1.

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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