The low the first trading day after the announcement was $72.38, which is 3.2% below the lower boundary of the one standard deviation range.
The chance of expiring in the money for maximum profit was 20.45% at the time I closed the position.
I would have considered hanging on had the price begun trending up again. However, prices today, the second trading day post-earnings, are in the process of creating an inside day -- essentially a sideways triangle.
The shares declined by 7.4% over the four-day lifespan of the position, or an annual rate of -875.0%. My options positions, which were leveraged, of course, produced a -316.7% loss on debit, or -28,895.8% annual rate.
There was nothing in the chart that pointed to a sudden reversal. Even volume had been rising along with the price prior to the announcement. Earnings came in at $1.23 per share, which is above the $1.193 consensus estimate. News reports blamed the decline on revenues that were lower than expected.
I count this as a true earnings surprise and see no "lessons learned" changes that need to be made.
The household goods retail chain Bed Bath & Beyond Inc.be (BBBY), headquartered in Union, New Jersey, publishes earnings Thursday after the closing bell. The chart is bullish. [BBBY in Wikipedia]
|Week||SD1 68.2%||SD2 95%||Chart|
Implied volatility stands at 36%, in the 96th percentile of the rise to the most recent peak on Jan. 6.
The one standard deviation range, encompassing 68.2% of trades between now and the January options expiration, provides a maximum potential gain or loss of 5.3%, and the two standard deviation range, covering 95% of trades, a gain or loss of 10.6%
Click on chart to enlarge.
|BBBY 180 dys 4-hour bars|
The proposed trade covers all but 75 cents of the one standard deviation range and all of the range down to resistance.
The risk/reward ratio is 4:1.
Decision for My Account
I've opened a position in BBBY as described above.
-- Tim Bovee, Portland, Oregon, Jan. 8, 2015
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".
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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
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