BABA, AAL Analysis

Update 5/30/2015: AAL expired out  of the money for maximum profit.

Shares declined by 1.4% over nine days, or a -58% annual rate. The options position produced a 100.0% yield on debit, for a +4,056% annual rate.

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Update 5/27/2015: BABA began declining immediately after I entered the position. With expiration approaching and no sign of a rapid recovery, I exited the position in order to avoid a larger loss.

Shares decllined by 0.9% over six days, or a -53% annual rate. the options position produced an 18.6% loss on debit, for a -1,132% annual rate

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The online commerce company Alibaba Group Holding Ltd. (BABA), headquartered in Hangzhou, China, broke above its 20-day price channel on Wednesday, producing a bull signal with high historical odds of success, and the airline holding company American Airlines Group Inc. (AAL), headquartered in Fort Worth, Texas, broke below its 20-day price channel, giving a bear signal with low historical odds of success.

BABA is a candidate for a directional trade, and AAL, for a non-directional trade.

I shall use the MAY5 Weeklys series of options, which trades for the last time !0 days hence, on May 29.

[BABA, AAL in Wikipedia]

BABA

Ranges

BABA has had only one bull signal since it began trading on Sept. 19, 2014. It was successful, yielding 12.2% over 39 days. Although that record technically gives BABA high historical odds of a successful bull signal, in practice, a single trade on a new stock is far from persuasive, especially when balanced by the stock's two bear signals, one a winner and one a loser.

Click on chart to enlarge.

BABA at 11:05 a.m. New York time, 90 days 2-hour bars

Implied volatility stands at 24.1%, which is 1.8 times the VIX, a measure of volatility of the S&P 500 index. BABA’s volatility stands at the lowest level since it began trading.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	96.41	99.73	92.00
Lower	89.77	86.45	77.77
Gain/loss	3.6%	7.1%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

Bull put spread short the $92.50 puts and long the $91 puts
sold for a credit and expiring May 30
Probability of expiring out-of-the-money

MAY5	Strike	OTM
	92.5	64.3%

The risk/reward ratio stands at 2.3:1. The premium is $0.43.

AAL

AAL has completed three bear signal in the past year, all of them unsuccessful. On average each lost 5.5% over 18 days.

Ranges

Click on chart to enlarge.

AAL at 11:20 a.m. New York time, 30 days hourly bars

AAL fell sharply in a sympathy move after Southwest Airlines (LUV) warned that its passenger unit revenue would drop this quarter. Should it be avoided as a "sound of the trumpets" event, or does the smoking field after the Napoleonic battle that inspired Nathan Rothschild's  dictum provide an opportunity for profit?

For stocks with low odds of successful signals, the by-the-book play would be a bull call spread, a trade contrary to the signal.  Yet, the battle may in fact still be raging. I may be hearings the "sound of cannons" and mistaking them for trumpets. That argues for the greater caution of a non-directional trade, an iron condor.

And indeed, a one-minute chart for the past day shows a neutral movement after the fall.

Click on chart to enlarge.

AAL at 11:35 a.m. New York time, 1 days 1-minute bars

Implied volatility stands at 36.6%, which is 28 times the VIX. AAL’s volatility stands in the 7th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	45.59	47.93	53.47
Lower	40.91	38.57	42.78
Gain/loss	5.4%	10.8%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

I consider the bias to be to the downside, so I've trimmed the profit zone at the top, leaving part of the one standard deviation range uncovered.

Iron condor short the $44 calls and long the $45 calls,
short the $40.50 puts and long the $39.50 puts
sold for a credit and expiring May 30
Probability of expiring out-of-the-money

MAY5	Strike	OTM
Upper	44	67.6%
Lower	40.5	83.7%

The risk/reward ratio stands at 1.8:1. The premium is $0.34 ($0.25 for the calls and $0.09 for the puts)

Decision for My Account

I've opened positions in BABA and AAL, as described above.

-- Tim Bovee, Portland, Oregon, May 21, 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.

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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.