Friday, August 9, 2013

CVI: Energy bear play

Update 10/29/2013: CVI on Oct. 16 moved above its 10-day price channel while sitting on the shelf waiting for a roll into a third bearish position, structured as short options spreads. That signal means that the possibility of a roll is off the table and it's time to do a reckoning.

My CVI holding was initially a short vertical options spread expiring in September and that was rolled into another one expiring in October.

During the periods I held open positions, the shares lost 0.6% over 30 days (split into two periods). That's -7.1% annualized.

The options spreads, which profit when the stock goes down, produced a 32.1% yield on risk, or 392.9% annualized. A tidy profit for 30 days work.

CVR Energy Inc. (CVI) broke below its 20-day price channel on Thursday, continuing a downtrend that began May 28 from $72.32. It has since the peak fallen 41.2% to Friday's low (so far) of $42.52.

The breakout coincided with the stock going ex-dividend for a 7.03% payout annualized. My rules require a further breakout below the ex-dividend day low, and CVI met that requirement.

The fall followed a spectacular seven-fold rise from $10.12 in November 2011.

This is the second downside breakout since the peak. The previous bear signal yielded a 13.9% profit over 22 days.

It is the sixth bear signal since the uptrend began in November 2011. Three of the completed signals were profitable, for an average gain of 9.1% over 25 days, compared to two unsuccessful trades that lost 8.3% over 15 days.

CVI 90 days 2-hour bars
The question is whether the present decline still has gravity or whether the correction is nearing an end. Friday's decline below the previous lower low seems to resolve the question in favor of further decline.

Moreover, Elliott wave analysis shows a wave down followed by a sideways correction and then the beginnings of a third wave down, the sort of pattern seen in a downtrend.

The first wave is $29.03 long, and under Elliott wave theory the third wave cannot be the shortest, suggesting the possibility at least the the third wave will terminate at $19.72 or lower.

It is also possible that the sideways trend continues in force, which would lead to more churning in the $44 to $49 range or thereabouts.

Elliott wave counts contain a high degree of ambiguity because of the fractal nature of the analysis -- waves within waves. I never treat them as conclusive; only as an analytical framework that suggests future possibilities.

CVI was among three symbols that survived my initial screening. (See "Friday's Prospects".) XXIA had options that lacked sufficient open interest for my taste, and HYPMY has volume under 1,000, making it far too illiquid than I prefer.

CVR Energy, headquartered in the Houston suburb Sugar Land, Texas, is an indy petroleum refiner and marketer of fuels as well as nitrogen fertilizers. 

It is followed by only a handful of analysts, who all place the company in the negative column.

The financials tell a much more optimistic story: Return on equity of 35% with debt amounting to only 33% of equity.

Earnings the last 12 quarters have been all over the place, with 2012 seeing quarterly peaks and 2013 seeing a retreat from those peaks.

Institutions own 98% of shares and the stock is in the bargain bin; it takes only 43 cents in shares to control a dollar in sales.

CVI on average trades 615,000 shares a day, sufficient to support a moderate selection of option strike prices with open interesting running to two and three figures.

The front-month at-the money bid/ask spread is 14.6%, on the high side but not out of line for such a stock trading under a million shares daily.

Implied volatility stands at 43%, near the bottom of the six-month range.

Options are pricing in confidence that 68.2% of shares will fall between $37.39 and $47.89 over the next month, for a potential gain or loss of 12.3%, and between $40.12 and $45.16 over the next week.

Trading in options today is running more than double the five-day average volume for puts, and 67% of average for calls.

The fair-price zone on today's 30-minute chart runs from $42.61 to $43.68, encompassing 68.2% of trades surrounding the most-traded price, $42.87. The price opened above the zone and has fallen steadily to the zone floor.

CVI next publishes earnings on Nov. 4. The stock goes ex-dividend in November for a quarterly payout yielding 7.03% annualized at today's prices.

Decision for my account: I've opened a bear position in CVI, structuring it as vertical option spreads expiring in September and sold for credit, short the $43 call and long the $45.50 call.

Because of CVI's volatility, the position provides high leverage of 7.2:1 with the maximum potential profit at expiration of 43%. The position provides a 3.1% cushion of profitability at expiration above the entry price.


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.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

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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