RRC Analysis

Update 12/4/2015: RRC attained 65% of its potential profit and I exited to avoid further risk. 

Shares declined by 7.0% over 37 days, or a +69% annual rate. The options position produced a +185.71% yield on debit for a +1,832% annual rate.

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The natural gas and oil company Range Resources Corp. (RRC), headquartered in Forth Worth, Texas, publishes earnings on Wednesday after the closing bell.

[RRC in Wikipedia]

RRC

I shall use the DEC series of options, which trades for the last time 51 days hence, on Dec. 18.

Ranges

Implied volatility stands at 73%, which is 4.9 times the VIX, a measure of volatility of the S&P 500 index. RRC’s volatility stands in the 97th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	37.89	46.02	32.44
Lower	21.65	13.52	27.10
Gain/loss	27.3%	54.6%

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

Analysts hold a strong opinion that RRC will produce a negative earnings surprise. I shall structure the position as a bear vertical spread.

Bear call spread, short the $30 calls and long the $32.5 calls,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
	30	57.7%

The premium is $0.80, which is 32% of the width of the position’s wing. The stock at the time of analysis was priced at $28.73.

The risk/reward ratio is 2.1:1.

The strike is $1.04 above the market price. The biggest immediate move after each of the past four earnings announcements was $2.67, and the average was $1.24.

Decision for My Account

I've opened a position on RRC as described above.

-- Tim Bovee, Portland, Oregon, Oct. 28, 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.