The share price rose by 3.9% over the nine-day lifespan of the position, or an annual rate of 159%. My options position produced a 100% yield on debit, for a 4,056% annual rate.
Update 2/4/2015: AMZN shares rose by 21.5% over the six-day lifespan of the position, for a 1,307% annual rate. The options produced a 281.8% loss on debit, a -17,144% annual rate.
GOOGL shares rose by 4.8% over the six-day lifespan of the position, for a 292% annual rate. The options produced a 156.4% loss on debit, a -9,512% annual rate.
The online retailer Amazon.com (AMZN), headquartered in Seattle, Washington, and the diversified technology company Google Inc. (GOOGL), headquartered in Mountain View, California, publish earnings after the closing bell today, Jan. 29. The payments company Mastercard Inc. (MA), headquartered in Purchase, New York, publishes prior to the opening bell the next day, Jan. 30.
All have Weeklys among their options inventories, and I shall trade the FEB1 series of options, which trades for the last time on Feb. 6, eight days hence.
AMZN
Volatility
Implied volatility stands at 43%, in the 73rd percentile of the rise from 27% on Nov. 26, 2014 to 48% on Jan. 15.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 320.55 | 339.64 | 316.93 |
| Lower | 282.37 | 263.28 | 285.25 |
| Gain/loss | 6.3% | 12.7% |
Direction
Click on chart to enlarge.
 |
| AMZN at 10:50 a.m. New York time, 30 days hourly bars |
The Jan. 23 peak was lower than the prior high in the triangle, making it part of of a semi-downtrend (lower highs, steady lows), although it came in above the prior turning point, making it an uptrend. Given the ambiguities, it's a judgement call, which is high sounding language for "make a guess". My sense is that at the larger scale, the downtrend is predominant.
Nearer term, the price is in the second day of a decline.
The directional score, based on the chart and analyst ratings, is -1, arguing for a bear position.
I shall structure my trade as a bear call spread.
The Trade
sold for a credit and expiring Feb. 7
Probability of expiring out-of-the-money
| FEB1 | Strike | % |
|---|---|---|
| 317.5 | 71.2 |
The risk/reward ratio stands at 13:50 (a bit less than 3:1). All of the chart range lies within the zone of maximum profit at expiration, and less than 1% of the one standard deviation range lies beyond it.
GOOGL
Volatility
Implied volatility stands at 29%, in 79th percentile of the rise from 19% on Nov. 8, 2014 to 32% on Dec. 16 2014. The peaks and valleys are less pronounced on GOOGL and on other stocks I've worked with, so the selection of the specific reference range is a bit arbitrary. However, the conclusion is sound: Implied volatility is relatively high.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 529.12 | 550.99 | 545.41 |
| Lower | 495.38 | 463.51 | 490.91 |
| Gain/loss | 4.3% | 8.6% |
Direction
Click on chart to enlarge.
 |
| GOOGL at 11:25 a.m. New York time, 30 days hourly bars |
The Jan. 23 peak marks the second upside test in a pause in the decline -- a sideways correction that could satisfy the forms of Elliott wave analysis either by plunging below the Jan. 12 low of $490.91 or by bouncing back to the upside from near the level for yet more sideways movement bounded to the top by $545 or its environs.
The trend on the 30-day chart could conceivably be rated as sideways for the full period or as a downtrend for the week. For scoring purposes, I'm going with the decline from Jan. 23 and calling it a downtrend.
The very near term trend today, as the day before, is down.
Despite the downtrending chart, analyst ratings are positive enough to nudge the directional score into positive territory, making it a 1. This argues for a bull position.
However, I'm quite nervous about the disconnect between the 53% enthusiasm rating from analysts and the downtrending chart. So I'm going to try to have my cake it to
I shall structure my trade as an iron condor, which profits from moves in either direcition -- up to a point.
The Trade
Iron condor, short the $530 calls and $480 puts and long the $540 calls and $470 puts
sold for a credit and expiring Jan. 7
Probability of expiring out-of-the-money
| FEB1 | Strike | % |
|---|---|---|
| Upper | 530 | 78.5 |
| Lower | 480 | 75.8 |
The risk/reward ratio stands at 223:1000 (a bit above 2:1).
MA
Volatility
Implied volatility stands at 33%, in the top percentile of the rise from 23% on Dec. 23, 2014 to 33% today
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 84.60 | 88.56 | 83.55 |
| Lower | 76.68 | 72.72 | 79.82 |
| Gain/loss | 4.9% | 0.0% |
Direction
Click on chart to enlarge.
 |
| MA at 12:10 p.m. New York time, 30 days hourly bars |
The counter-trend correction itself pause beginning Jan. 8 to construct a descending triangle, with a base of $81.83. The price broke below the base significantly on Jan. 27 and again, more decisively, on Jan. 28, in the area marked in yellow.
MA has been in a clear downtrend since the December 2014 peak but has switched to a sideways pause today.
That switch to a sideways trend in the very near term raises the directional score, based on the chart and analyst ratings, to 2, arguing for a bull play, despite the recent downward trend of the chart.
I shall structure the trade as a bull put spread.
The Trade
Bull put sprad, short the $79 puts and long the $78 puts
sold for a credit and expiring Feb. 7
Probability of expiring out-of-the-money
| FEB1 | Strike | % |
|---|---|---|
| Upper | 84 | 75.4 |
The risk/reward ratio stands at 13:50, somewhat below 3:1.
Decision for My Account
I've opened positions in AMZN, GOOGL and MA as decribed above.
-- Tim Bovee, Portland, Oregon, Jan. 29, 2015
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".
The directional score is calculated as the sum of the following:
- Zacks rating --The Zacks ratings are translated as follows: 1=2, 2=1, 3=0, 4=-1 and 5=-2.
- Enthusiasm rating --: A single percentage derived from the number of analysts whose opinions are in one of five categories: Strong buy, buy, hold, sell and strong sell.
- Strong buy share -- The percentage of all analysts who rank the stock strong buy. If the share is 60% or greater, the score is 1; if 40% or less, then the score is -1; otherwise, the score is zero.
- Ethusiasm momentum -- The score is 1 if today’s enthusiasm rating is larger than the rating 30 days earlier; otherwise, the score is zero.
- 30-day direction -- The trend that best describes the 30-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
- One-day direction -- The trend that best describes the one-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
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.
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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.
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