Update 12/15/2014: INFY reversed and headed south, and I've headed out of the position for a loss.
Shares lost 12.4% over the 14-day lifespan of the position, a 323% annual rate. The options spreads produced a 54.2% loss on debit, a 1,413.5% annual rate.
Update 12/1/2014; With the Thanksgiving holiday over, I've opened a bull position in INFY. Implied volatility stood at 29%, in the 60th percentile of its rise to a 37% peak on Oct. 7.
I structured the position as a bull put spread, short the $70 puts and long the $67.50 puts, sold for a credit and expiring Dec. 19.
At the time of the trade, options were pricing in confidence that 68.2% of trades over the next month would fall between $64.19 and $74.81, and 95% between $58.37 and $81.83.
The nature of the options grid made it impossible to protect the entirety of the 68.2% confidence range. Although the lifespan of the position in small, I'll need to be agile enough to close it early should the price threaten to move out of the money, below $70 minus the premium received.
Update 11/25/2014: INFY never approached its peak of Nov. 24 in trading today, the net day, and has fallen back into its 20-day price channel, negating the bull signal. The two-day chart, below, with after-hours and pre-open trading highlighted, illustrates the very near term downtrend that INFY has entered.
I'm moving INFY to the Watchlist as a potential trade if the uptrend should resume.
Click on chart to enlarge,
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| INFY 3 days 5-minute bars |
Infosys Ltd. (
INFY) has broken out to the upside amid a sideways correction that has so far lasted a decade and a half. It is near the top of the range. The ceiling is in sight, and with it major resistance, but it is a very high ceiling that leaves room to rise.
The Chart
INFY, like most tech companies, hit a peak in 2000 and then collapsed when the bubble burst. It has since been tracing a largely sideways correction that has lasted a decade and a half.
Click on chart to enlarge.
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| INFY nearly 16 years monthly bars (left), 2 years 8 months daily bars (right) |
As always on a chart of this scale, there are ambiguities in the Elliott wave framing. The relative magnitudes of the waves are uncertain, and even the nature of the correction is a subject for disputation.
I'm confident of my analysis of the decline as a five-way structure to the downside, part of an encompassing wave that might be wave A {+4} down, or that might be the wave 1 {+4} of a true downtrend.
My peak for wave 2 {+3} is certainly open to question. The whole structure at the {+2} degree could in fact be a very large second-wave triangle that is still unfolding.
Unlike many charts, the large structures count in analyzing this one. The Tech Bubble peak was $93.75. The highest high so far of the correction was $77.92. Therefore, this morning's opening price of $68.95 is approaching the nearest resistance and is almost within sight of the more distant peak.
Whichever way I choose to analyze the structure at the {+2} degree, the reality is that INFY is approaching a reversal point if it is intact in a downward correction. If, instead, it has begun a new uptrend, then $93.75 will be a pause before the price moves to still higher highs.
Bottom line: At this point I cannot assign a directional bias to this chart. Based on other factors, I'm leaning toward an upward assessment, and while the chart doesn't forbid such an analysis, it does little to buttress it.
Odds and Yields
INFY has completed 16 breakouts to the upsidesince wave 2 {+1} began in July 2012. Ten were successful, on average yielding 6.7% over four days. The unsuccessful trades lost 2.9% over 11 days, on average.
The resulting win/lose yield spread is acceptable, at 3.8%.
The Company
Infosys, headquartered in
Bangalore, Kamakata in India, provides a range of services to businesses involving their information systems (hence the company name). It trades on the New York Stock Exchange as American depository receipts and is India's fifth-largest publicly traded company.
Analyst opinion is negative, coming down collectively at a negative 40% enthusiasm rating.
This runs contrary to the message of the return on equity, reported at 24%, with no long-term debt.
Earnings have been profitable in each of the past 12 quarters, remaining steady over time without a trend.
Two quarters have produced downside surprises. The most recent was the 2nd quarter of 2013.
The earnings yield is 4.92%, compared to a 2.28% yield on 10-year U.S. Treasury notes. The dividend yield is 1.4% annualized at today’s prices.
The "fair" price implied by earnings growth estimates is $52 per share, compared to the market price of $69.13 per share. The market premium is 33% above the implied price.
The stock is selling at 20 times earnings and also at a premium to sales. It takes $4.84 in shares to control a dollar in sales.
Institutional ownership is low, at 17% of shares.
Infosys next publishes earnings on Jan. 9. The stock goes ex-dividend in January for a semiannual payout of 48.55 cents per share.
Liquidity and Volatility
INFY on average trades 1.4 million shares a day and supports a moderate selection of option strike prices spaced $2.50 apart., with open interest running to three figures figures near the money.
The front-month at-the-money bid/ask spread on calls is 6.5%, compared to 0.5% on the most traded symbol on the U.S. markets, the exchange-traded fund SPY.
Implied volatility stands at 24%, compared to 12% for the S&P 500 index, and is on the rise after hitting a low of 18% on Nov. 13. INFY's volatility is in the 33rd percentile above the end of its decline to its mid-November low.
That level of volatility implies that the most profitable trades will be structured as long option spreads, bought| with a debit and expiring in an out month.
Options are pricing in confidence that 68.2% of trades will fall between $64.14 and $73.84 over the next month, for a potential gain or loss of 7%, and that 95% will fall between $58.29 and $78.89.
Calls are trading at typical levels today, at about their five-day average volume, but puts are quite low, at 35% of the average.
Decision for My Account
Despite the difficulties in assigning direction to the chart, the signal was bullish and the stock has been in an uptrend since May 29. Resistance is 13% away to the upside. The internal count within wave 5 {-1} is a bit muddy, but it appears to have some space to run before hitting its final leg, wave 5 {-2}.
Given the volatility level, I intend to structure the position as a bull call spread, long the $67.50 calls and short the $70 calls, and expiring April 17. The rise in the implied volatility, if it continues, will be good for the position.
The risk/reward ratio is 1.1:1. The leverage is 4.3:1.
I'll open the position in the half hour before the closing bell, if the chart continues to show upward momentum. If it falters, then I'll put the symbol on the Watchlist.
-- Tim Bovee, Portland, Oregon, Nov. 25, 2014
References
My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
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.
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 shorter-term 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.
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.
License
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
