ADBE shares declined by -2.1% over the four-day lifespan of the position, or a -189% annual rate. My options produced a 100% yield on debit for a 9,125% annual rate.
FDX shares declined by 3.2% over four days, or a 290% annual rate. The options produced a 100% yield on debit for a 9,125% annual rate.
Update 3/18/2015: I closed my position in ADBE as the price flirted with the upper boundary of the zone of profitability. Shares gained 2.2% over the one day lifespan of the position, or a 789% annual rate. The iron condors produced a 66.3% yield on debit, for a 24,205% annual rate.
The software company Adobe Systems Inc. (ADBE), headquartered in San Jose, California, and the enterprise software and services company Oracle Corp. (ORCL), headquartered in Redwood City, California and best known for its database management systems, publish earnings after the closing bell on Tuesday, and the shipping and business services company FeEx Corp. (FDX), headquartered in Memphis, Tennessee, publishes earnings before the opening bell on Wednesday.
The monthly MAR series of options trades for the last time on March 20, three days hence, and shall be the trading vehicle.
ADBE
The goal of my trade is to construct a direction-neutral position with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.
Ranges
ADBE began its most recent leg to the upside in early February, peaking at $80.30 on Feb. 27. That marks resistance on the chart. The price then retraced a portion of the gain, down to $75.68, the support level, on March 11 and then resumed its rise.
The resumption of the uptrend won't be definitive until the price breaks above resistance.
Click on chart to enlarge.
 |
| ADBE at 9:45 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 81.20 | 83.60 | 80.30 |
| Lower | 76.42 | 74.02 | 75.68 |
| Gain/loss | 3.0% | 40.92% |
The Trade
I'm going with a direction-neutral trade, given the fact that the price is recovering from a counter-trend correction that may in fact not yet be concluded.
short the $75 puts and long the $72.50 puts
sold for a credit and expiring March 21
Probability of expiring out-of-the-money
| MAR | Strike | % |
|---|---|---|
| Upper | 85 | 75 |
| Lower | 75 | 77 |
The risk/reward ratio stands at 2:1.
FDX
Ranges
FDX began a leg up in October 2014, peaking in December at $183.51. From that point the price began to trace out a sideways movement that is still underway.
The most recent peak in the series of zig-zags was $180.05 on Feb. 19. Subsequently, the price dropped to a low of $170.00 on March 10. I am using those levels to define support and resistance although, as is always the case with a sidewinder, there is a case to be made for other reversal points.
Click on chart to enlarge.
 |
| FDX at 10:12 a.m. New York time, 30 days hourly bars |
| MAR | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 181.78 | 185.84 | 180.05 |
| Lower | 173.68 | 169.62 | 170.00 |
| Gain/loss | 2.3% | 4.6% |
The Trade
I shall use a range-bound strategy for this trade.
short the $170 puts and long the $167.50 puts
sold for a credit and expiring March 21
Probability of expiring out-of-the-money
| MAR | Strike | % |
|---|---|---|
| Upper | 182.5 | 72.3 |
| Lower | 170 | 79.8 |
The risk/reward ratio stands at a bit higher than 3:2.
ORCL
Ranges
ORCL peaked at $46.71 in December 2014 and began a stair-step to the downside.
The most recent lower high in the pattern, $44.37, was set on Feb. 17. The price subsequently declined to a new lower low, $41.26, on March 12. I've used those two levels as support and resistance on the chart.
Click on chart to enlarge.
 |
| ORCL at 10:25 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 44.66 | 45.90 | 44.37 |
| Lower | 42.16 | 40.92 | 41.26 |
| Gain/loss | 2.9% | 5.8% |
The Trade
I shall also use a sideways strategy for ORCL. I've built in a higher range of profitability to the upside than to the downside. I had to compromise coverage in order to get a reasonable premium on the position, and from the chart the downside seemed to be the less risky side to pare on.
short the $42 puts and long the $44 puts
sold for a credit and expiring March 21
Probability of expiring out-of-the-money
| MAR | Strike | % |
|---|---|---|
| Upper | 46 | 76.1 |
| Lower | 42 | 64.4 |
The risk/reward ratio stands about even.
Decision for My Account
I've opened positions in ADBE, FDX and ORCL as described above.
-- Tim Bovee, Portland, Oregon, March 17, 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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