Shares declined by 1.6% in a day, or a -583% annual rate. Options positions produced a 120.0% yield on debi for a +43,800% annual rate.
The data management and storage company NetApp Inc. (NTAP), headquartered in Sunnyvale, California, publishes earnings on Wednesday after the closing bell.
[NTAP 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 2.7 times the VIX, a measure of volatility of the S&P 500 index. NTAP’s volatility stands in the peak of its annual range.
|Week||SD1 68.2%||SD2 95%||Earns|
On the chart NTAP has been in a downtrend since late last year. A counter-trend reversal ended in a peak on Nov. 23, and the downtrend then resumed.
Zacks Investment Research, in its freely available analysis, gives NTAP a Rank of 3, which is neutral, with no expectation of an earnings surprise.
Analysts in aggregate are wildly pessimistic, giving NTAP a negative 67% enthusiasm index. However, 15% of analysts tracking the stock give it a strong buy recommendation.
NTAP has been more likely than not to fall in price on the first trading day after earnings.
I shall go with a neutral strategy, offsetting to the downside if the grid will permit it.
short the $26 puts and long the $25 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money
The risk/reward ratio is 3.5:1.
The zone of profit in the proposed trade covers a $4 move either way. The biggest immediate move after each of the past four earnings announcements was $3.56, and the average was $2.17.
Decision for My Account
I've opened a position on NTAP as described above.
-- 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.
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