SNDK Analysis

Update 7/30/2015: SNDK moved out of the money to the upside, and I've exited the calls, transforming the position into a bull put spread. I'll calculate profit and loss after expiration on Saturday.

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The flash memory manufacturer SanDisk Corp. (SNDK), headquartered in Milpitas, California, publishes earnings on Wednesday after the closing bell.

[SNDK in Wikipedia]

SNDK

Rumors

SNDK rose sharply in mid-June after their were rumors of a buyout offer for a rival company Micron Technology (MU). However, SNDK's price quickly resumed its downward course, and I judge that the rumor has no bearing on today's trading decision. However, I could be wrong, and so the reports are a risk factor.

Ranges

Click on chart to enlarge.

SNDK at 11:15 a.m. New York time, 90 days 2-hour bars

Implied volatility stands at 52.5%, which is 4.3times the VIX, a measure of volatility of the S&P 500 index. SNDK’s volatility stands in the peak of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	58.65	63.12	71.24	68.80
Lower	49.71	45.24	53.18	39.56
Gain/loss	8.3%	16.5%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
SNDK's maximum post-earnings movement is more than double the average, which produces a range of $59.28 to $49.08, close to the one standard deviation range. I shall use that narrower range in setting up my proposed trade.

The Trade

I shall use the JUL5 weekly series of options, which trades for the last time nine days hence, on July 31.

In constructing the trade, I've covered all of the average earnings move on the upside and all of the one standard deviation move to the downside within the zone of profit. The price trend is down, yet the chance of expiring out of the money for maximum profit is greatest to the upside. I built it that way because if there is indeed buy-out activity happening behind the scenes, any surprise along those lines will likely cause the price to rise.

Iron condor, short the $59.50 calls and long the $61 calls,
short the $49.50 puts and long the $48 puts,
sold for a credit and expiring Aug. 1.
Probability of expiring out-of-the-money

JUL5	Strike	OTM
Upper	59.5	81.9%
Lower	49.5	74.6%

The premium is $0.48, which is about half of the width of the position’s wings.The stock at the time of purchase was priced at $54.1-.

The risk/reward ratio is 2.1:1.

The zone of profit in the proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $14.62, and the average was $5.10.

Decision for My Account

I've opened a position in SNDK as described above.

-- Tim Bovee, Portland, Oregon, July 22, 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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Based on a work at www.timbovee.com.