Sheldon Natenberg in his excellent study of options, Options Volatility & Pricing, recommends this strategy for traders who are bullish a stock but neutral implied volatility: "go on vacation". Sound advice.
The brokerage and bank E-Trade Financial Corp. (ETFC), a pioneer in online stock trading, with headquarters in New York City, broke above its 20-day price channel on Wednesday and confirmed the bull signal today by trading still higher.
[ETFC in Wikipedia]
ETFC's chart shows an amazing ride. From a peak of $260.80 in 2007, the price had crashed to $5.90 by 2009, the Great Recession low. Since the the stock has inched its way upward, with the occasional burst of bullish enthusiasm, and has quintupled in price from that dismal low.
Click on chart to enlarge.
|ETFC 7 years weekly bars (left), 90 days 2-hour bars (right)|
Elliott wave analysis suggests that ETFC is in the 3rd wave of that recovery and in the 3rd wave of a 3rd wave of lower degree. This suggests that there will be much energy to the upside.
The price is also in blue-sky territory for the post-recession, trading at the highest levels since the crash.
A caveat: ETFC has a particularly ill-formed chart. In terms of Elliott, it doesn't count well. It lacks elegance. This lessens my confidence in my analysis. The count for the nearer term, on the right-hand chart, has greater clarity than the count for the longer term, and so inspires greater confidence.
Odds and Yields
ETFC has completed nine breakouts since the present high-level 3rd wave began in July 2012. Six were successful, on average yielding 8.7% over 62 days. The unsuccessful trades lost 6.3% over 20 days, on average.
Analyst enthusiasm is bullish, coming down collectively at a 44% enthusiasm rating.
The company reports a return on equity of 6%, with debt running at 50% of equity.
Earnings have been profitable in 10 of the past 12 quarters -- the losers were in 2012.
Eight quarters have produced upside surprises and three have surprised to the downside. The most recent of the downside surprise was in 2013.
The earnings yield is 3.91%, compared to a 1.79% yield on 10-year U.S. Treasury notes. The company pays no dividend.
The "fair" price implied by earnings growth estimates is $25.57 per share, compared to the market price of $25.49 per share. The market premium is nearly identical to the implied price.
The stock is selling at 26 times earnings and also at a premium to sales. It takes $4.03 in shares to control a dollar in sales.
Institutions own 92% of shares.
ETFC next publishes earnings on April 21.
Liquidity and Volatility
ETFC on average trades 4.6 million shares a day and supports a wide selection of option strike prices spaced 50 cents apart near the money, with open interest running two triple digits, although its a bit spotty.
The front-month at-the-money bid/ask spread on calls is 9.4%, compared to 0.8% on the most traded symbol on the U.S. markets, the exchange-traded fund SPY.
Implied volatility stands at 39%, compared to 17% for the S&P 500 index, and is rising. ETFC's volatility is in the 51st percentile of its rise to a high of 45% attained on Jan. 16.
That level of volatility implies that the most profitable trades will be structured as shares or their synthetic equivalent.
Options are pricing in confidence that 68.2% of trades will fall between $22.66 and $28.34 over the next month, for a potential gain or loss of 11.1%, and that 95% will fall between $19.38 and $31.17.
Options are trading on the slowly today, with calls running at 62% of their five-day average volume and puts at 26% of average.
Decision for My Account
With implied volatility on neutral ground in the 51st percentile, I can't buy or sell a vertical spread.
A synthetic long future -- buy the at-the-money call and sell the at-the-money put -- would be one possibility, but it is unhedged to the downside, and that's a lot of risk. One way of dealing with it would be through a smaller trade size
Another possibility is to buy a calendar spread as a way of earning income on the position.
I'll work with those with an eye to placing the trade today shortly before the closing bell.
-- Tim Bovee, Portland, Oregon, Feb. 5, 2015
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.
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.