Shares rose by 24.3% over 36 days, or a +246% annual rate. The options position produced a -43.2% loss on debit for a -438% annual rate.
Update 12/4/2015: JD rose to the upper boundary of profitability in the days after earnings were published, and there it has teetered ever since. I have sold the call options of the position, leaving a bull put spread to expire in two weeks.
The online electronics retailer JD.com Inc. (JD), headquartered in Beijing, publishes earnings on Monday before the opening bell.
[JD in Wikipedia]
JD
I shall use the DEC series of options, which trades for the last time 35 days hence, on Dec. 18.
Ranges
Implied volatility stands at 75%, which is 3.8 times the VIX, a measure of volatility of the S&P 500 index. JD’s volatility stands at the peak of its annual range.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 33.75 | 40.11 | 29.40 |
| Lower | 21.03 | 14.67 | 25.38 |
| Gain/loss | 23.2% | 46.4% |
The Trade
Over the past year the stock price has had a downward bias on the first trading day after an earnings announcement.
Zacks Investment Research's analysis of JD results in a score of 3, which is direction neutral, and no expectation of an earnings surprise either way.
Nine analysts providing coverage of JD on balance have an 11% enthusiasm rating, with a ratio of Strong Buy to other recommendations of 1.3:1.
JD reached an all-time high on June 12 and then fell into a correction that continues. After a hitting a low during the Aug. 24 China Panic, JD rose, retracing about half of the declined, and has since reversed again to the downside.
A play on JD is essentially a play on the China, and the JD price pattern resembles that of FXI, which tracks blue chips on the Chinese markets.
I am bearish China but agnostic over the very near term, which is what an earnings play relies on, so I shall go with a directional neutral play, which is in line with the preponderance of my analytical tools.
I initially constructed this trade but the price ran away with me and I couldn't get a fill,
short the $21 puts and long the $20 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money
| DEC | Strike | OTM |
|---|---|---|
| Upper | 33 | 84.2% |
| Lower | 21 | 83.7% |
The risk/reward ratio is 3:1.
The zone of profit in the proposed trade covers a $6 move either way. The biggest immediate move after each of the past four earnings announcements was $2.01, and the average was $1.01.
I then restructured the trade by dropping up the call vertical half of the iron condor down one dollar, to this,
short the $21 puts and long the $20 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money
| DEC | Strike | OTM |
|---|---|---|
| Upper | 32 | 81.8% |
| Lower | 21 | 82.6% |
The premium is $0.25, same as the earlier proposed trade. The stock at the time of entry was priced at $27.53.
The risk/reward ratio is 3:1.
The zone of profit in the proposed trade covers a $5 move either way, one dollar less than with the earlier proposal. That is still sufficient to cover the $2.01 maximum post-earnings move of the past year.
Decision for My Account
I placed an order for a position on JD and was unable to get a fill. I restructured it, as discussed above, and the position was filled immediately.
-- Tim Bovee, Portland, Oregon, Nov. 13, 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.License
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