Wednesday, November 18, 2015

NTAP Analysis

Update 11/19/2015: The day after earnings were published NTAP attained 55% of its maximum potential profit and I have exited to avoid further time risk.

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.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

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.

Iron condor, short the $34 calls and long the $35 calls,
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 premium is $0.22, which is 22% of the width of the position’s wings. The stock at the time of entry was priced at $30.99.

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.
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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