DVN Analysis

Update 12/2/2015: DVN reached 50% of its potential profit and I exited my position, thereby avoiding further time risk.

Shares declined by 1.4% over 29 days, or a +17% annual rate. The options position produced a 100.0% yield on debit for a +1,259% annual rate.

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The fossil fuels exploration and development company Devon Energy Corp. (DVN), headquartered in Oklahoma City, Oklahoma, publishes earnings on Tuesday after the closing bell.

[DVN in Wikipedia]

DVN

I shall use the DEC series of options, which trades for the last time 45 days hence, on Dec. 18.

Ranges

Implied volatility stands at 43%, which is triple the VIX, a measure of volatility of the S&P 500 index. DNV’s volatility stands in the 51st percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	51.33	58.07	50.20
Lower	37.87	31.13	39.00
Gain/loss	15.1%	30.2%

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

Analysts anticipate a negative earnings surprise, and I shall structure the position as a bear play.

Bear call spread, short the $47.50 calls and long the $50 calls,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
	47.5	68.9%

The premium is $0.64, which is 26% of the width of the position’s wing. The stock at the time of entry was priced at $44.94.

The risk/reward ratio is 2.8:1.

The short strike is $2.56 above the entry price.The biggest immediate move after each of the past four earnings announcements was $5.60 and the average was $2.65.

Decision for My Account

I've opened a position on DVN as described above.

-- Tim Bovee, Portland, Oregon, Nov. 3, 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.