Tuesday, November 10, 2015

M Analysis

The department store chain Macy's Inc. (M), headquartered in Cincinnati, Ohio, publishes earnings on Wednesday before the opening bell.

[M in Wikipedia]


I shall use the DEC series of options, which trades for the last time 38 days hence, on Dec. 18.


Implied volatility stands at 61%, which is 3.7 times the VIX, a measure of volatility of the S&P 500 index. M’s volatility stands in the 97th 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

I'm unable to determine a direction for M. Zacks score is bearish at 4, and the Zacks Expected Surprise Prediction is 1.89%. (Both numbers are available to non-subscribers at Zacks Investment Research.) A bearish score and a bullish ESP presents a poor correlation. I shall construct a direction-neutral trade.

Iron condor, short the $55 calls and long the $57.50 calls,
short the $37.50 puts and long the $35 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money


The premium is $0.59, which is 24% of the width of the position’s wings. The stock at the time of analysis was priced at 47.02.

The risk/reward ratio is 3.2:1.

The zone of profit in the proposed trade covers a $8.75 move either way. The biggest immediate move after each of the past four earnings announcements was $3.47, and the average was $2.53.

Decision for My Account

I entered an order on M as described above but was unable to get a fill at price that would provide both a risk/reward ratio that meets my criteria and sufficient reward to make the play worth my while. I have withdrawn the order and shall not be entering a position on M to coincide with the November earnings announcement.

-- Tim Bovee, Portland, Oregon, Nov. 10, 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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