Tuesday, November 24, 2015

DE Analysis

Update 1/4/2016: DE reached 51% of its potential profit and I exited the position.

Shares rose by 0.5% over 41 days, or a +4% annual rate. The options position produced a +103% yield on debit for a +913% annual rate

The heavy equipment company Deere & Co. (DE), headquartered in Moline, Illinois, publishes earnings on Wednesday before the opening bell.

[DE in Wikipedia]


I shall use the JAN series of options, which trades for the last time 52 days hence, on Jan. 16.


Implied volatility stands at 44%, which is 2.6 times the VIX, a measure of volatility of the S&P 500 index. DE’s volatility stands in the 84th 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 most recent earnings announcement, on Aug. 24, produced an 8.1% decline, a major outlier among the other announcements of the past year.

Excluding the outlier, the range implied by the maximum earnings move is $77.91 to $70.13.

The Trade

DE has been in a strong downtrend since June 30.

Zacks Investment Research, in line with the chart, is somewhat bearish on DE, giving it a Rank of 4, with no expectation of an earnings surprise.

Half of the last four earnings announcements have resulted in next-day price rises.

Analysts in aggregate are quite negative about DE's prospects, with an enthusiasm index of -76. However, 12% of analysts covering the symbol give it a strong buy recommendation.

I shall construct a bearish position in anticipation of a post-earnings decline.
Bear call spread, short the $77.50 calls and long the $80 calls,
sold for a credit and expiring Jan. 17.
Probability of expiring out-of-the-money


The premium is $0.80, which is 32% of the width of the position’s wings. The stock at the time of entry was priced at $74.54.

The risk/reward ratio is 2.1:1.

The strike price is $2.96 above the market price. The biggest immediate move after each of the past four earnings announcements was $7.36, and the average was $3.19. Excluding the large decline after the most recent earnings announcement, the average movement would be $1.80 and the largest, $3.89.

Decision for My Account

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

-- Tim Bovee, Portland, Oregon, Nov. 24, 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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