However, implied volatility is extremely high. It is at the 100th percentile of the annual range and is 63% above the quarterly historic volatility.
Those levels imply that I want to structure my position as a short options spread, sold for credit. It's a variation on buy low sell high. If volatility is high, then I want to sell it, and that's what an options credit spread does.
Also, high volatility implies that a price decline lies ahead. This contradicts the chart analysis. I listen to both.
Finally, te XRS options lack sufficient liquidity to meet my preferences. Long shares are the only choice I have. So, I'm passing on the trade and removing XRS from my Watchlist.
TAL Education Group (XRS) has a quirky chart. I can do an Elliott wave count of the rise from $11.70 on Aug. 30 until I reach the peak of $20.44 on Nov. 13.
From that point, the XRS chart because what Arthur Conan Doyle described in his Sherlock Holmes novel House of the Baskervilles: "Over the green squares of the fields and the low curves of a wood there rose in the distance a grey, melancholy hill, with a strange jagged summit, dim and vague in the distance like some fantastic landscape in a dream."
In other words, I don't know what to make of it. Were that Mr. Holmes here today to help!
Click on the chart to enlarge.
|XRS 2 years 2-day bars (left), 90 days 2-hour bars (right)|
The Elliott wave count up from Aug. 29 is far from typically. I can't really get a reasonable count out of that period. It is only from Aug. 30 that the count resolves into something I'm comfortable with, but the lack of a count for the earlier part of the rise means I can't say within any certainty what the present highest degree is.
Is XRS tracing a fifth wave that ends it's rise, or is it a third wave, as I've counted it in the right-hand chart, with much more upside potential? Time will tell, but time's tales do traders little good -- usually by then it's too late to profit.
XRS broke beyond its 20-day price channel on Dec. 24, confirming the bull signal today by continuing to trade above the channel. Wall Street chit chat is attributing the sharp rise to whispers about XRS as a speculative play. Elliott wave theory, of course, attributes the rise to the imperatives of mass psychology that triggered the inevitable third wave.
It is the second XRS bull signal since the rise began on Aug. 30 of this year. The first yielded an astounding 42% over 66 days.
TAL Education Group is a China play headquartered in Beijing. It provides tutoring for primary and secondary school students covering a wide range of subjects.
It is the Chinese version of what the Japanese call "juku", the British "crammers", and the French, in a gush of Gallic wordiness, "classes préparatoires aux grandes écoles". TAL provides classes for the children of parents who are are ambitious for their children and want them to have an edge.
TAL Education is followed by only a handful of analysts, but they are unanimously positive about its prospects, giving it a rare 100% enthusiasm rating.
The company reports return on equity of 22%, but there is no debt/equity ratio available, as is sometimes the case for foreign companies. The company pays no regular dividend, but there was a hefty special dividend last year that amounts to a 9.3% yield at today's prices. Whether that sort of profits distribution will happen again is anyone's guess.
Earnings typically peak in the summer quarter, with profits accelerating for at least two years. The company has produced an earnings surprise to the upside in each of the last 11 quarters.
XRS has an earnings yield of 2.1%, lower than 85% of other companies in its industry. The stock is priced at 48 times earnings, and shares are also selling at a high multiple of sales. It takes $7.05 in shares to control a dollar in sales.
Institutions own 71% of shares.
XRS on average trades 342,000 shares a day, sufficient to support a small selection of option strike prices spaced $2.50 apart.
Open interest is in double digits near the money and so the contracts are far too illiquid for my preferences. The front-month at-the-money bid/ask spread on calls is wide, at 17.5%. Any position I open in XRS will be structured as long shares.
Implied volatility stands at 41% and has been falling since Dec. 24 following a rise from 36% on Dec. 12. Volatility is at the 53rd percentile, a further argument in favor of shares rather than options spreads.
Options are pricing in confidence that 68.2% of trades will fall between $19.42 and $24.66 over the next month, for a potential gain or loss of 11.9%, and between $20.78 and $23.30 over the next week.
Contracts are trading actively today with a bias toward puts, which are running 158% above their five-day average volume. Calls are running at 120% above average.
XRS next publishes earings on Jan. 20.
Decision for my account: I intend to open a bull position in XRS if it shows upside momentum during the last half hour of trading. I'll structure the position as long shares.
I'm willing to trade XRS now, despite my aversion to trades during the holiday season, because it is a Chinese company. Presumably, more people are trading it who don't take off for Christmas.
If momentum falters, then I'll add XRS to my Watchlist for further consideration.
My shorter-term 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. The principal practitioner 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.
Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.
See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.
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.