[TWTR in Wikipedia]
I shall use the AUG1 weekly series of options, which trades for the last time 11 days hence, on Aug. 7.
Click on chart to enlarge.
|TWTR at 10:13 a.m. New York time, 30 days hourly bars|
|Week||SD1 68.2%||SD2 95%||Chart||Earns|
TWTR presents the spectacle of a symbol whose maximum post-earnings movements are greater than the two standard deviation range, a sight I have rarely seen and one that will reduce the premium if I place that entire range within the zone of profit.
The best coverage I can provide on this grid is this:
short the $27 puts and long the $25 puts,
sold for a credit and expiring Aug. 8.
Probability of expiring out-of-the-money
The premium is $0.22, which is 15% of the width of the position’s wings.The stock at the time of analysis was priced at $34.23.
The risk/reward ratio is 9:1.
The zone of profit in the proposed trade covers $8,50 move either way. The biggest immediate move after each of the past four earnings announcements was $9.39, and the average was $7.37.
I could increase the premium, and thereby lower the risk, by lower the upper boundary of the profit zone. However, I judge that to be unwise because TWTR has been in a neutral trend for the past month, not a downtrend. Today's decline appears to be a market-wide phenomenon tied to a sharp market decline in China and so may be an ephemeral phenomenon. I'm reluctant to take the risk of shrinking the coverage zone.
Decision for My Account
I'm passing on TWTR because of I can't provide an adequately wide profit zone for sufficient premium. I won't be placing a trade to coincide with TWTR's earnings announcement.
-- Tim Bovee, Portland, Oregon, July 27, 2015
My volatility trading rules can be read here.
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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.
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