HOG Analysis

Update 11/9/2015: I've exited my bull position on HOG. It fell sharply after earnings were announced and hasn't recovered. Moreover, I'm bearish the general market.

Shares declined by 13.1% over 21 dyas, or a -227% annual rate. The options position produced a -69.4% loss on debit for a -1,206% annual rate.

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The motorcycle company Harley-Davidson Inc. (HOG), headquartered in Milwaukee, Wisconsin, publishes earnings on Tuesday before the opening bell.

[HOG in Wikipedia]

HOG

I shall use the NOV series of options, which trades for the last time 32 days hence, on Nov. 20. I considered the DEC options, but low open interest and wide bid/ask spreads argued against them.

Ranges

Implied volatility stands at 36%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. HOG’s volatility stands in the 63rd percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	62.30	68.35	62.30
Lower	50.20	44.15	50.20
Gain/loss	10.8%	21.5%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

I'm structuring this as a bull play, based on analyst expectations of a positive earnings surprise and a tendency over the past year for earnings announcements to produce a price rise..
Bull put spread, short the $55 puts and long the $52.50 puts,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money

NOV	Strike	OTM
	55	60.3%

The premium is $0.75, which is 30% of the width of the position’s wing. The stock at the time of analysis was priced at $56.54.

The risk/reward ratio is 2.9:1.

The short strike is $1.54 below the entry price. The biggest immediate move after each of the past four earnings announcements was $6.05, and the average was $3.84.

Decision for My Account

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

-- Tim Bovee, Portland, Oregon, Oct. 19, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, 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.