ADI Analysis

Update 12/16/2015: ADI attained half its potential profit and I exited.

Shares rose by 0.24% over 23 days, or a +4% annual rate. The options position produced a 97.4% yield on debit for a +1,545% annual rate.

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The data conversion and signal processing semiconductor company Analog Devices Inc. (ADI), headquartered in Norwood, Massachusetts, publishes earnings on Tuesday after the opening bell.

[ADI in Wikipedia]

ADI

I shall use the JAN series of options, which trades for the last time 53 days hence, on Jan. 16.

Ranges

Implied volatility stands at 39%, which is 2.5 times the VIX, a measure of volatility of the S&P 500 index. ADI’s volatility stands in the 56th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	65.78	74.29	60.12
Lower	48.76	40.25	54.42
Gain/loss	14.9%	29.7%

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

ADI is on the third leg of a downtrend that began June 1. The current leg down began Oct. 13.

Zacks Investment Research gives ADI a bearish 4 rank with no expectation of an earnings surprise.

Analysts in aggregate are bullish on ADI, with an enthusiasm rating of 32%. Of analysts following the symbol, 64% have given it a Strong Buy recommendation.

I shall construct a neutral position with the goal of covering all of the maximum post-announcement price movement of the past year.

Iron condor, short the $62.50 calls and long the $65 calls,
short the $50 puts and long the $47 puts,
sold for a credit and expiring Jan. 17.
Probability of expiring out-of-the-money

JAN	Strike	OTM
Upper	62.5	78.8%
Lower	50	70.2%

The premium is $0.75, which is 27% of the width of the position’s wings. The stock at the time of entry was priced at $57.26.

The risk/reward ratio is 3:1.

The zone of profit in the proposed trade covers a $6.25 move either way. The biggest immediate move after each of the past four earnings announcements was $2.85, and the average was $1.64.

Decision for My Account

I've entered a position on ADI as described above.

-- Tim Bovee, Portland, Oregon, Nov. 23, 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.