Tim Bovee, Private Trader: LVS: A short-term gamble

Update 12/23/2014: LVS reversed direction from bearish to bullish on Dec. 17, beginning a rise that brought the price out of profitability three days before expiration. I've marked the entry and exit points on the chart below in red.

Click on chart to enlarge.

LVS 15 days 15-minute bars

The price remained within the one standard deviation range. However, the structure of the grid required that I leave 22% of that range unprotected. It is that 22% that tripped up the trade.

The stock rose by 2.7% over the 14-day lifespan of the position, for a 71.2% annual rate of change. The options spreads produced a 58.8% loss on debit, a 1,533.6% annual rate of change.

The casino and resort hotel company Las Vegas Sands Corp. (LVS), headquartered in Paradise, Nevada, has been in a downtrend since peaking on March 7 at $88.28. That would be important information for a trade lasting months, but I'm doing something different with LVS this time.

The stock came to my attention under my shorter-term trading system, which indeed usually brings up trades lasting for months. However, I don't want to tie up my money for that long because of the impending earnings season, which begins Jan. 8. So I'm structuring any trade I might place in LVS as a very short term position, lasting a few weeks at most.

The analytical form must follow the structure of the trade. Rather than doing an Elliott wave analysis and looking at the financial situation of the company, I'll be applying the same volatility analysis that I use for trades that are keyed to earnings announcements. [LVS in Wikipedia]

Volatility

Implied volatility stands at 36%, in the 66th percentile of the rise to 43%, the peak attained on Oct. 14. Volatility has since declined sharply to 28% on Nov. 14 and then has risen again.

There's a bit of ambiguity here in trying to structure a short spread sold for a credit. Volatility is high, as is required, but the trend is upward, suggesting that it will move still higher rather than reversing and declining, which is the outcome that is best for such positions.

The one standard deviation range, encompassing 68.2% of trades, implies a potential gain or loss of 4.9% over the next week, and the two standard deviation range, enclosing 95%m implies a gain or loss of the period of 9.9%.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	58.72	61.48	59.79
Lower	53.18	50.42	55.11

Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

Click on chart to enlarge.

LVS 2 years daily bars (left), 15 days 15-minute bars (right)

The charts mainly point to the downward trend of the LVS chart. There has simply been no upward countertrend retracement worthy of the name. So the $58.79 upside resistance that I chose is a bit arbitrary.

I'm proposing to structure the position as a short bear call options spread expiring Dec. 26, the DEC3 series of Weeklys. I also looked at the series expiring Jan. 2, the JAN1 Weeklys, but found the pattern of open interest defeated my best efforts to build a trade.

Another reason for going sooner rather than later is that LVS announces earnings on Jan. 28. I want to be out before hitting the 30-day period prior to the announcement.

In the case of the DEC4 series, as well, the open interest distribution has been spotty and difficult to deal with. Here's my best:

Bear call spread, short the $57 calls and long the $59 calls sold for a credit and expiring Dec. 26 Probability of expiring out-of-the-money

DEC4	Strike	%
	57	64.40

The risk/reward ratio is 3.2:1. The position leaves 22% of the one standard deviation range uncovered, and greater portions of the two standard deviation and chart ranges. The shorter time until expiration mitigates the risk somewhat.

Decision for My Account

I have taken the trade. The order was filled immediately, without any need to lower my asking price.

-- Tim Bovee, Portland, Oregon, Dec. 9, 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.

My method of scoring price and volatility responses to earnings, used in the "Chart" section, is the simplest imaginable. Looking at the four most recent earnings announcements, I give one point for a rising price or rising volatility in the week after the announcement, subtract a point to a falling price or volatility, and give a zero if the response is sideways movement. I then add the four quarters together to produce separate scores for price and volatility, and then add the two to produce a combined score.

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.