Two symbols that meet my criteria for further analysis will publish earnings after the closing bell on Wednesday, April 8, the first day of the 1st quarter earnings season:
- The aluminum and other lightweight metals company Alcoa Inc. (AA), headquartered at Lever House in New York City.
- The housewares retailer Bed Bath & Beyond (BBBY), headquartered in Union, New Jersey.
AA
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
Click on chart to enlarge.
 |
| AA at 10:25 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 14.52 | 15.36 | 13.88 |
| Lower | 12.84 | 12.00 | 12.65 |
| Gain/loss | 6.2% | 12.3% |
The Trade
The strong upward push of the price and the nearness of the upper boundary of the chart range implies a strategy of expanding the zone of profit upward while cutting coverage at the lower end of the ranges. That's the strategy taken in the proposed trade below.
An alternative would be to do a bullish directional trade, but I'm reluctant to do so because the price has not yet broken above the chart range and the broader trend is down. I want to allow for at least the possibility of a reversal.
short the $13.50 puts and long the $12.50 puts
sold for a credit and expiring April 18.
Probability of expiring out-of-the-money
| APR | Strike | OTM |
|---|---|---|
| Upper | 15 | 89.7% |
| Lower | 13.5 | 53.2% |
The risk/reward ratio stands at 2.5:1. I find that to be high for an iron condor position.
BBBY
Ranges
Click on chart to enlarge.
 |
| BBBY at 11 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 81.39 | 85.99 | 78.10 |
| Lower | 72.17 | 67.57 | 74.93 |
| Gain/loss | 6.0% | 12.0% |
The Trade
The sharp decline in the stock price suggests trimming the zone of profit from the top, and that's what I've done with this proposed trade. The chart range is unusually narrow in the case of BBBY, so I've used the chart range for the upper boundary of the zone of profit, and the wider one standard deviation range for the lower boundary.
short the $72 puts and long the $70 puts
sold for a credit and expiring April 18.
Probability of expiring out-of-the-money
| APR | Strike | OTM |
|---|---|---|
| Upper | 79 | 67.6% |
| Lower | 72 | 72.7 |
The risk/reward ratio stands at 1:1. The premium is 95 cents (59 cents for the calls and 36 cents for the puts).
Decision for My Account
I'm declining to take the trade in AA because of the high risk/reward ratio resulting from the low stock price and the nearness of the price to resistance.
I've opened a position in BBBY as described above.
-- Tim Bovee, Portland, Oregon, April 8, 2015
References
My volatility trading rules can be read here.
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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
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Based on a work at www.timbovee.com.
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