Tim Bovee, Private Trader: SAVE Analysis

Thursday, July 23, 2015

SAVE Analysis

The low-cost air carrier Spirit Airlines Inc. (SAVE), headquartered in Miramar, Florida, publishes earnings on Friday before the opening bell.

[SAVE in Wikipedia]

SAVE

Ranges

Click on chart to enlarge.

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

Implied volatility stands at 40.1%, which is 3.4 times the VIX, a measure of volatility of the S&P 500 index. SAVE’s volatility stands in the 70th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	68.49	75.44	64.81	68.76
Lower	54.59	47.64	57.26	54.32
Gain/loss	11.3%	22.6%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

I shall use the AUG monthly series of options, which trades for the last time 29 days hence, on Aug. 21.

The price is rising but is in the middle of the range between support and resistance on the chart. I've chosen to sacrifice some premium by placing all but a few cents of maximum post-earnings movement range of the past year into the zone of top profit. That also covers the one standard deviation range.

Iron condor, short the $70 calls and long the $75 calls,
short the $55 puts and long the $50 puts,
sold for a credit and expiring Aug. 22.
Probability of expiring out-of-the-money

AUG	Strike	OTM
Upper	70	89.7%
Lower	55	82.1%

The premium is $0.70, which is 14% of the width of the position’s wings.The stock at the time of analysis was priced at $61.62.

The risk/reward ratio is 6,1:1.

The zone of profit in the proposed trade covers a $7.50 move either way. The biggest immediate move after each of the past four earnings announcements was $7.22, and the average was $4.28.

Decision for My Account

The high risk-reward ratio is the stumbling point. And it's inevitable, give the structure of SAVE's options grid, with strike price $5 apart on a stock priced in the double digits.

I'm passing on this trade. I won't be opening a position in SAVE to coincide with its next earnings announcement.

-- Tim Bovee, Portland, Oregon, July 23, 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.