TWTR, LNKD: Volatility plays

Update 2/12/2015: I closed my iron condor on TWTR. The shares rose by 14.0% over the seven-day lifespan ofthe postion, or a 730% annual rate. The options that made up my position produced a -36.2% loss on debit, for a 1,889% annual rate.

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Update 2/11/2015: I closed my iron condor on LNKD. The price gapped up above the profitable zone after earnings were announced.

The share price rose by 15.4% over six days, or a 937% annual rate. My options position produced a 67.3% loss on debit, for a -4,092% annual rate.

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Two social networking platforms, Twitter Inc. (TWTR), headquartered in San Francisco, California, and LinkedIn Corp. (LNKD), headquartered in Mountain View, California, publish earnings after the closing bell today, Feb. 5.

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, eight days hence.

[TWTR, LNKD in Wikipedia]

TWTR

Volatility

Implied volatility stands at 70%, in the 86th percentile of the rise to 74% on Jan. 15.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	46.33	50.66	42.66
Lower	37.60	268.39	36.17
Gain/loss	7.6%	15.3%

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

Click on chart to enlarge.

TWTR @10:45 a.m. New York time,  69 days 2-hour bars

Since going public in October 2013, TWTR has been on a roller-coaster ride of sorts, with emphasis on the downward slopes. It peaked a few months after the IPO, lost nearly two thirds of its value, recovered to the mid-point of the decline, and the began to fall again, reversed, and on Feb. 3 began a breakout push to the upside.

Nice plot, although a bit melodramatic.

The directional score, based on the chart and analyst ratings, is 3, clearly arguing for an uptrend. However, the blooming confusion of trendlines on the chart for the past month or so argues against clarity.

Zacks Investment Research gives TWTR a neutral rating, in line with the brokerage analysts, only half a percent of whom give TWTR a strong buy rating or its equivalent.

In two of the last four earnings announcements, the price has been below the pre-announcement level, and in two, it has been above.

I cannot call a direction on this stock.

The Trade

I'm structuring the trade as a very wide iron condor that will cover all of the one standard deviation range. It is profitable up to 10% above today's high so far and all the way down to the Jan. 28 reversal point, which is 16% below today's high.

Iron condor, short the $47 calls and $36 puts and long the $49 calls and $34 puts
sold for a credit and expiring Feb. 14
Probability of expiring out-of-the-money

FEB2	Strike	%
Upper	47	77
Lower	36	80

The risk/reward ratio stands at 2:1.

LNKD

Volatility

Implied volatility stands at 52%, in the 96th percentile of the rise to 52% on Feb. 2.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	250.62	268.39	243.25
Lower	215.10	197.33	215.73
Gain/loss	7.6%	15.3%

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

Click on chart to enlarge.

LNKD @11:17 a.m. New York time, 180 days 4-hour bars

LNKD dropped to a low five months after going public in May 2011. From that point it began a rise that quadrupled the price at its peak in September 2013. Since then LNKD has moved into a counter-trend correction, with a major decline that ended in May 2014, and then a fresh rise that is continuing today, although it remains below the 2013 peak of $257.56.

From the autumn of 2014 LNKD began a series of undulations that, while still uptrending, suggested a weakening of the bullish consensus among traders. That pattern continues today, with the latest bump up having peaked on Dec. 19, 2014 at $243.25.

The directional score, based on the chart and analyst ratings, is 5, arguing for a bull position. Zacks gives LNKD a neutral rating. Brokerage analysts are bullish, with a 37% enthusiasm index, and with 67% giving the stock a strong buy recommendation or its equivalent.

Three out of the last four earnings announcements have produced price rises, with the stock trading above the pre-announcement level five days later.

The direction is uptrending but the undulating nature of the chart gives me reservations.


The Trade

I'm structuring the position as an iron condor. This allows me broader protection to the downside than a simple vertical spread would, and also a better risk/reward ratio

Iron condor, short the $250 calls and $215 puts and long the $252.50 calls $210 puts
sold for a credit and expiring Feb. 14
Probability of expiring out-of-the-money

FEB2	Strike	%
Upper	250	75
Lower	215	73

The risk/reward ratio stands at 2:1.

Decision for My Account

I've opened both positions as described above.

-- Tim Bovee, Portland, Oregon, Feb. 5, 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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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.