Tim Bovee, Private Trader: GE and AMD: Volatility plays

Thursday, October 16, 2014

GE and AMD: Volatility plays

General Electric Co. (GE), the Fairfield, Connecticut transnational technology and financial services company, publishes earnings prior to the opening bell on Friday, Oct. 17. (GE in Wikipedia.)

GE has a lot going for it -- major player, very liquid, convenient price per share. But then, there are those nagging areas of doubt. Sometimes, it just comes down to a question of character.

Advanced Micro Devices Inc. (AMD), the Sunnyvale, California semiconductor manufacturer publishes after the closing bell today, Oct. 16. However, the stock is also trading for $2.61 a share, far too low a price to successfully construct a viable options spread, so I'm rejecting it without further analysis. (AMD in Wikipedia.)

Volatility

Implied volatility stands at 27%, at the 97th percentile of its one-year range, having hooked down slightly on Tuesday from Monday's year-high and then risen again during the market-wide decline on Wednesday.

My rules for volatility plays require a downward hook in order to place the trade, so GE's position as a viable trade depends upon what volatility does today.

Options are pricing in confidence that 68.2% of trades will fall between $23.37 and $25.19 over the next week, for a potential gain or loss of 3.%, and between $23.8 and $24.69 over the next day.

Chart

Implied volatility has split half and half in its response to earnings announcements, rising twice and falling twice over the past year. The rises were earlier in the past year, and the declines occurred after the last two earnings announcements.

Price movement has also been inconsistent, rising once, falling twice, and meandering sideways once.

This pattern is a major strike against GE as a potential trade.

Earnings

GE more than most companies is a bulwark of stability, a no-drama bastion in a sea of emotion and angst.

The Street is expecting the 3rd quarter earnings to come in on Friday slightly above the year-ago quarter and slightly below the quarter immediately prior. The only significant variations in earnings results have come in the 4th quarters, the peak earners of the year, which have been rising steadily since at least 2012.

The company consistently produces earnings surprises -- that is, the street got it wrong -- but they are quite small, sometime on the order of several 10ths of a cent. Earnings have surprised to the downside three times in the past three years, the most recent being this year's 2nd quarter. All other earnings reports have surprised to the upside.

Trade

I would structure a position as a bear call options spread, using the weeklys, short the $24.50 calls and long the $25.50 calls, sold for a credit and expiring Oct. 31.

Decisions for My Account

I'm passing on the GE trade. The inconsistent response to earnings announcements by both implied volatility and price increases the risk beyond where I'm willing to go.

In my book, there is no way for a trader to predict the future. If someone claims that power, hold on to your wallet and walk away.

However, I have found that stocks have character, and GE's character has been of a stable pillar of the community, the sort who serves on the boards of charities and provides an example for everyone else, and who yet harbors a vast sea of insecurity, a doubt that leads to secret behaviors that lead everyone to whisper, "I wouldn't have expected that."

That inconsistency lessens my confidence in the likelihood of a profit.

(Note to self: Historical confidence is a quality that ought to be quantifiable -- given a score. Must work on that.)

-- Tim Bovee, Portland, Oregon, Oct. 16, 2014

References

My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

From time to time 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.

Disclaimer

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 decisions for his or her own account, and take responsibility for the consequences.