Shares rose by 3.2% over 16 days, or a +74% annual rate. The options position produced a 2.4% loss on debit, for a -55% annual rate.
Update 11/4/2015: The long leg of my vertical spread was assigned on 11/3, placing short shares of WFC in my account. I bought the shares on 11/4, leaving the position as a long call. I shall calculate results once the entire position is complete.
The financial company Wells Fargo & Co. (WFC), headquartered in San Francisco, California, publishes earnings on Wednesday after the closing bell.
[WFC in Wikipedia]
WFCI shall use the NOV series of options, which trades for the last time !# days hence, on Nov. 20.
Ranges
Implied volatility stands at 30%, which is 1.7 times the VIX, a measure of volatility of the S&P 500 index. WFC’s volatility stands in the 53rd percentile of its annual range.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 57.43 | 62.56 | 57.16 |
| Lower | 47.17 | 42.04 | 47.44 |
| Gain/loss | 9.8% | 19.6% |
The Trade
Analysts have low expectations of an earnings surprise. However, it's a marginal call that could also be interpreted as leaning toward a bearish surprise. So I'll try two strategies: An iron condor skewed to provide greater downside coverage, and a bear call spread.
The biggest immediate move after each of the past four earnings announcements was $4.86, and the average was $3.20. In both cases,
short the $45 puts and long the $40 puts,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money
| NOV | Strike | OTM |
|---|---|---|
| Upper | 52.5 | 55.4% |
| Lower | 45 | 91.0% |
The premium is $1.23, which is 25% of the width of the position’s wings. The stock at the time of analysis was priced at $52.31.
The risk/reward ratio is 3.1:1.
The zone of profit in the proposed trade covers a $5 move either way.
Turning next to the bearish strategy.
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money
| NOV | Strike | OTM |
|---|---|---|
| 52.5 | 55.4% |
The premium is $0.78, which is 31% of the width of the position’s wing. The stock at the time the order was filled was priced at $52.17.
The risk/reward ratio is 2.2:1.
The strike price was 83 cents above the stock price.
Decision for My Account
I'm partial to the bearish alternative. There's little to choose between it and the iron condor. The lower strike is offset by a better risk/reward ratio and elimination of risk in one direction.
I've opened a bear call spread as described above.
-- Tim Bovee, Portland, Oregon, Oct. 13, 2015
References
Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.
Alerts
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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
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
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