YHOO Analysis

Update 11/18/2015: YHOO reached 51% of its maximum potential profit and I exited to avoid further time risk.

Shares declined by 1.4% over 29 days, or a -17% annual rate. The options position produced a 103.6% yield on debit for a +1,304% annual rate.

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The information company Yahoo! Inc. (YHOO), headquartered in Sunnyvale, California, publishes earnings on Tuesday after the closing bell.

[YHOO in Wikipedia]

YHOO

I shall use the DEC series of options, which trades for the last time 58 days hence, on Dec. 18.

Ranges

Implied volatility stands at 48%, which is 3.2 times the VIX, a measure of volatility of the S&P 500 index. YHOO’s volatility stands in the 81st percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	39.50	45.85	34.97
Lower	26.80	20.45	31.33
Gain/loss	18.9%	38.3%

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

The evidence on which direction YHOO is likely to move is ambiguous, although perhaps with a slightly bearish bias. I shall go with a non-directional trade.

Iron condor, short the $37 calls and long the $39 calls,
short the $28 puts and long the $26 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
Upper	37	78.0%
Lower	28	80.6%

The premium is $0.57, which is 29% of the width of the position’s wings. The stock at the time of purchase was priced at $33.17.
The risk/reward ratio is 2.5:1.

The zone of profit in the proposed trade covers a $4.50 move either way. The biggest immediate move after each of the past four earnings announcements was $1.82, and the average was $0.96.

Decision for My Account

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

-- Tim Bovee, Portland, Oregon, Oct. 20, 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.