[WFM in Wikipedia]
WFM
I shall use the AUG1 weekly series of options, which trades for the last time nine days hence, on Aug. 7.
Ranges
Click on chart to enlarge.
 |
| WFM at 10:40 a.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart | Earns |
|---|---|---|---|---|
| Upper | 42.86 | 45.47 | 41.97 | 45.12 |
| Lower | 37.66 | 35.05 | 38.90 | 35.40 |
| Gain/loss | 6.5% | 12.9% |
The Trade
WFM's situation is similar to that noted in my analysis of TWTR: The maximum movement immediately after earnings is wide, near the two standard deviation range. That lower premium and increases risk in relation to reward, although it also increases the odds of the price staying within the profit zone.
short the $35 puts and long the $34 puts,
sold for a credit and expiring Aug. 8.
Probability of expiring out-of-the-money
| AUG1 | Strike | OTM |
|---|---|---|
| Upper | 45 | 89.9% |
| Lower | 35 | 88.7% |
The premium is $0.16, which is 16% of the width of the position’s wings. The stock at the time of analysis was priced at $40.11.
The risk/reward ratio is 5.3:1.
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 $4.86, and the average was $3.30.
The draft trade covers in the zone of profit the entirety of the one standard deviation and chart ranges, leaving only slivers of the two standard deviation and earnings ranges outside the zone.
WFM is a downtrending stock, whose average earnings moves range from $36.97 to $43.56. One possible adjustment would be to lower the top boundary of the profit zone so near the top of the average earnings moves, while retaining the lower maximum earnings moves level for the lower boundary.
Iron condor, short the $43 calls and long the $44 calls,
short the $35 puts and long the $34 puts,
sold for a credit and expiring Aug. 8.
Probability of expiring out-of-the-money
| AUG1 | Strike | OTM |
|---|---|---|
| Upper | 43 | 79.2% |
| Lower | 35 | 88.7% |
Under the second scenario, the premium is $0.26, which is about a quarter of the width of the position’s wings. The stock at the time of analysis was priced at $40.06.
The risk/reward ratio is 2.8:1.
The zone of profit in the proposed trade covers a $4 move either way. The biggest immediate move after each of the past four earnings announcements was $4.86, and the average was $3.30.
Either scenario produces a risk/reward ratio that is too high for my liking. I'm passing on WFM and won't be opening a position to coincide with the company's earnings announcement.
-- Tim Bovee, Portland, Oregon, July 27, 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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