CVS, KO, AKAM: Volatility plays

Update 2/14/2015: CVS expired within the range of maximum profit defined by the iron condor.  Shares rose by 2.9% over the five-day lifespan of the positon, or a 214% annual rate, closing at $102.63. The iron conor produced a 100% yield on debit, for a  7,300% annual rate.

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Update 2/9/2015: I've opened an iron condor as described below.

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The pharmacy CVS Health Corp. (CVS), headquartered in Woonsocket, Rhode Island; the soft-drink maker The Coca-Cola Co. (KO), headquartered in Atlanta, Georgia; and the cloud infrastructure company Akami Technologies Inc. (AKAM), headquartered in Cambridge, Massachusetts, publish earnings prior to the opening bell on Tuesday, Feb. 10.

Both have Weeklys among their options inventories, and I shall use the FEB2 series of options, which trades for the last time on Feb. 13, four days hence.

[CVS, KO, AKAM in Wikipedia]

CVS

Volatility

Implied volatility stands at 21%, in the 95th percentile of the previous rise

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	102.79	104.97	101.45
Lower	98.43	96.25	99.84
Gain/loss	2.2%	4.3%

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

Click on chart to enlarge.

CVS at 9:55 a.m. New York time, 30 days hourly bars

CVS has been a long uptrend since August 2008. It peaked Jan. 28 at $101.59 and has subsequently completed a leg down and then entered a leg up that has so far fallen short of the peak.

The price has been trending sideways the past few days, with the lower boundary of around $99.85 having been tested twice.

All of the last four earnings announcements have been followed by price rises.

The directional score, based on the chart and analyst ratings, is 3, arguing for a bull position.

The Trade

The proposed trade is skewed to the upside, covering nearly all of the 2 standard deviation range int that direction and covering all of the chart range to the downside.

Iron condor, short the $98.5 puts and long the $106 puts,  short the $104 calls and long the 106 calls
sold for a credit and expiring Feb. 14
Probability of expiring out-of-the-money

FEB2	Strike	%
Upper	104	93
Lower	98.5	63

The risk/reward ratio stands at 5:2.

KO

Volatility

Implied volatility stands at 00%, in the 00 percentile of the rise from 00% on Xxx. 00 to 00% on Xxx 00.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	42.25	43.15	42.09
Lower	40.45	39.55	40.09
Gain/loss	2.2%	4.4%

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

Click on chart to enlarge.

KO at 10:30 a.m. New York time, 30 days hourly bars

KO is in the 3rd leg of its downward march since November 2014. In terms of Elliott wave analysis, it has completed waves A and B and is now in wave C, typically the most dynamic of the trio.

The price response to KO's earnings announcements over the past year has split evenly. Two announcements produced a rise, and two -- the most recent -- a fall.

The directional score, based on the chart and analyst ratings, is -, arguing for a bear position.

The Trade

The following trade is the best I can put together, and it has an overly wide risk/reward ratio.

Iron condor, short the $43 calls and long the $45 calls,
short the $40 puts and long the $38 puts
sold for a credit and expiring Feb. 14
Probability of expiring out-of-the-money

FEB2	Strike	%
Upper	42	69
Lower	40	78

The risk/reward ratio stands at 7:2.

AKAM

Volatility

Implied volatility stands at 00%, in the 00 percentile of the rise from 00% on Xxx. 00 to 00% on Xxx 00.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	63.78	66.44	61.80
Lower	58.48	55.82	56.85
Gain/loss	4.3%	8.7%

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

Click on chart to enlarge.

AKAM at 10:55 a.m. New York time, 30 days daily bars

AKAM has been in a very large sideways pattern for the past decade. It is a large-scale structure, so there is money to be made from the wide swings. It is, however, non-trending.

The decline after the peak reached $56.85 on Feb. 2 and then reversed. The most recent high, $61.80 on Friday, is 39 cents above the prior high, although the price has pulled back to the downside today.

Prices have risen in two of the last four quarters following earnings announcements, and fallen in two. The prices were up after the most recent announcement.

The directional score, based on the chart and analyst ratings, is 0.

Based on the chart and the directional score, I'm unable to pick a direction for this play.

The Trade

Based on the non-directional nature of the chart and the score, I see an iron condor as the only reasonable way to construct a trade. However, open interest is fairly spotty, and I can't build an inron condor without using low liquidity strike prices.

For that reason, I'm not taking this trade.

Decision for My Account

I shall open an iron condor on CVS as described above. I'm choosing to pass on the KO and AKAM trades.

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

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.


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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.

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