Wednesday, November 18, 2015

CRM Analysis

Update 11/19/2015: The day after earnings were published CRM reached 76% of its maximum potential profit. I exited to avoid further time risk.

Shares rose by 5.4% over one day, or a +1,980% annual rate. The options position produced a 308.3% yield on debit for a +112,542% annual rate.

The cloud computing and customer relationship management company (CRM), headquartered in San Francisco, California, publishes earnings on Wednesday after the closing bell.

[CRM in Wikipedia]


I shall use the DEC series of options, which trades for the last time 30 days hence, on Dec. 18.


Implied volatility stands at 50%, which is 2.8 times the VIX, a measure of volatility of the S&P 500 index. CRM’s volatility stands in the 69th percentile of its annual range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

On the chart CRM peaked on Nov. 2 and is either in the early stages of a decline or is n a minor countertrend pullback.

Zacks Investment Research, in the freely available portion of its analysis, gives CRM a rank of 3, which is neutral, with no expectation of an earnings surprise.

Analysts tracking CRM collectively come down with a 65% enthusiasm rating, with 77% of analysts giving a strong buy recommendation.

I bearish the market overall, but for CRM, the bear case isn't backed by the chart. There's also the fact that CRM has tended to trade higher the day after earnings announcements.

I shall use a bullish strategy, providing added protection to the downside if the grid allows it.

Bull put spread, short the $70 puts and long the $67 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money


The premium is $0.49, which is 20% of the width of the position’s wing. The stock at the time of entry was priced at $76.89.

The risk/reward ratio is 4.1:1.

The short strike is $6.89 below the market price. The biggest immediate move after each of the past four earnings announcements was $7.37, and the average was $3.54.

Decision for My Account

I've placed an order on CRM as described above and shall update with the fill.

-- Tim Bovee, Portland, Oregon, Nov. 18, 2015


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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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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