PAYX never managed confirmed breakout, and today it pushed sharply below the 10-day price channel. I have removed PAYX from the Watchlist and tallied up the bill.
Over its 11 day lifespan, PAYX shares rose 3.9%, or 129.6% annualized.
My long options spread produced a 9.3% yield on risk, or 309.2% annualized.
A lot of work for such a short-lived play.
Update 10/18/2013: PAYX retreated slightly from its high for the day in the last two hours of trading but remained above its open and halted its decline with 15 minutes left to trade.
I structured the position as a long vertical spread expiring in March. The bull call spread is long the $41 call options and short the $43 calls. It has 3:1 leverage and a maximum potential yield at expiration of 31.5%. The reward/risk ratio is 1:1. The position has no hedge.
Paychex Inc. (PAYX) continued its large scale upward correction, hitting a new 20-day high on Thursday and confirming the bull signal today by trading still higher.
The present leg up, which I've labelled as wave (C) under the Elliott wave analysis, began concurrently with a rise in the broad markets on Oct. 4, 2011.
As with the markets generally, the PAYX uptrend has shown great power, completing six successful bull signals out of nine. The winners on average yielded 4.1% over 41 days, compared to a 1.8% loss over eight days on average for the unsuccessful signals.
At a large enough scale, upward corrections are indistinguishable to the trader from uptrends.
|PAYX 3 years 2-day bars (left), 90 days 2-hour bars (right)|
Wave (C) is the third wave within from the Great Recession low set in 2009 by PAYX and the markets generally. Wave (A), an uptrend, ended in April 2011 and Wave (B), six months later. The present wave (C) has risen for a more than two years.
The present wave subdivides into a series of ever smaller wave series. By my count PAYX is in the middle wave of a five-wave series -- wave 3 -- at a magnitude one step below that of wave (C).
Narrowing the time frame, I count PAYX as being in middle waves all the way down: wave [iii] of wave iii of wave 3 of wave (C).
That count -- a third wave of a third wave of a third wave -- gives room for the uptrend to continue.
PAYX has shown a diminution of its momentum in the present wave iii. The two bull signals it has completed in that movement split. One was successful with a 3.1% yield over 28 days, and one failed with a 1.8% loss over 10 days.
The end of wave (C) will be followed by a major decline. The pre-recession peak was $47.14, and if the price moves above that level, it would discredit my count completely.
PAYX was one of 10 symbols that survived my initial screening last night. (See "Friday's Prospects".)
Two of the survivors, SDS and SH, were inverted, leveraged funds. I don't trade those and so I removed them from consideration.
I prefer symbols with sufficient options liquidity to support a trade and so I set aside PUK, SPH, GEF, RUK and CGEMY.
FGP has rising within a fairly near-term uptrend, which in my opinion lowers my chances of a successful trade.
XLV, the health-care exchange-traded fund, was interesting but lacked upward momentum today. I'll add it to my Watchlist and see what develops.
That left PAYX.
Paychex, headquartered in Rochester, NY, provides payroll, human resources and benefits for small to medium-sized businesses, under the slogan, "Your Business is About Customers, Not Payroll Management". It has about 567,000 clients.
Given that business model, it is no wonder the PAYX chart matches the broad markets so closely. The company will lag or prosper depending on the state of the general economy.
Analysts have a dismal view of Paychex' prospects, collectively giving it a negative 89% enthusiasm rating. (Should that be an 89% loathing rating?)
The company's current financials certainly don't support that view. Return on equity is a stunning 35% with no long-term debt. That's growth stock territory.
Paychex' earnings peak each year in the spring quarter and have increased steadily, year over year, for the past three years. The company has produced 10 upside earnings surprises in the last 12 quarters and has surprised to the downside twice.
Institutions own 64% of shares, whose price has been bid up into speculative territory. It takes $6.42 in shares to control a dollar in sales.
PAYX on average trades 2.3 million shares a day and supports a moderate selection of option strike prices spaced a dollar apart, with open interest running at three and four figures for those strikes where I would construct an options spread.
The front-month at-the-money bid/ask spread on calls is 6.3%.
Implied volatility is quite low, at 13%, near the bottom of its six-month range. It has been falling since late September, when it hit a near-term peak of 21%.
Options are pricing in confidence that 68.2% of trades will fall between $40.04 and $43.26 over the next month, for a potential gain or loss of only 3.9%, and between $40.88 and $42.42 over the next week.
Trading in contracts today is skewed toward calls, which are running at 14% above their five-day average volume. Puts are running at 53% of average.
Paychex next publishes earnings on Dec. 16. The stock goes ex-dividend on Oct. 30 for a quarterly payout yielding 3.36% annualized at today's prices.
Decision for my account: I intend to open a bull position on PAYX if its momentum continues during the last half hour before the closing bell. I'll update this analysis with details of the trade.
If momentum falters, then I'll add PAYX to my Watchlist for further consideration.
Because of the low implied volatility, I'll structure the trade as a long vertical spread -- a bull call spread.
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. 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.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
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.