Wednesday, March 4, 2015

CIEN: Volatility play

Update 3/7/2015: My options on CIEN expired without value on Saturday for maximum profit.

Shares rose by 2.1% over the two-day lifespan of the position, or a 390% annual rate. The options produced a 100.0% yield on debit, for a 18,250% annual rate.

The communications networking tools company Ciena Corp. (CIEN), headquartered in Hanover, Maryland, publishes earnings on Thursday, March 5, prior to the opening bell.

CIEN has Weeklys among its options inventories, and I shall use the MAR1 series of options, which trades for the last time on March 6, two days hence.

[CIEN in Wikipedia]


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.


CIEN has been in a wide-swinging sideways trend since its Great Recession low in 2009. It is taking the form of a symmetrical triangle whose boundaries at present are approximately $27 on the upside the $16.50 on the downside.

An upswing that began in September 2014 hit what seems most likely to be a reversal within the ongoing leg up in early March.

I anticipate that the reversal will end above the $19.91 support level set and then continue to highs above the $21.21 resistance level.

Click on chart to enlarge.
CIEN at 10:40 a.m. New York time, 30 days hourly bars
Implied volatility stands at 49%, in the 94th percentile of the most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

Although Zacks Investment Research is neutral about CIEN's prospects, brokerage analysts in the the aggregate are quite bullish, with an enthusiasm index of 53% and 71% giving the stock a "strong buy" rating. My directional score is positive.

Given those scores, I'm willing to give up a bit of coverage on the downside in return for greater coverage to the upside.

The proposed trade below has a low end (not including the premium) that is nine cents above the lower boundary of the chart range, and an upper end that is $1.79 above the chart range.

Iron condor short the $23 calls and long the $25 calls,
short the $20 puts and long the $18 puts
sold for a credit and expiring March 7
Probability of expiring out-of-the-money


The risk/reward ratio stands at 5:2.

Decision for My Account

I've opened an iron condor on CIEN as described above.

-- Tim Bovee, Portland, Oregon, March 4, 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".

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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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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