Monday, November 30, 2015

NXPI Analysis

Update 3/3/2016: I exited the long leg of my position for a loss, producing an overall loss for the entire series.

Shares declined by 189.0% over 94 days, or a -70% annual rate. The options series produced a 30.9% loss on debit for a -1190% annual rate.

NXPIdiagonal, short leg
option description key: long/short, call/put, strike, series

The semiconductor maker NXP Semiconductors N.V. (NXPI), headquartered in Eindhoven, Netherlands, closed above its 20-day price channel on Friday. With a history of bull-signal whipsaws and low implied volatility relative to the one-year range, NXPI is a candidate for a time spread.

[NXPI in Wikipedia]


For the long leg, I shall use the JUL series of options, which trades for the last time 228 days hence, on July 15, and for the short leg, the JAN series, which completes trading 46 days from now, on Jan. 16.


Implied volatility stands at 39%, which is 2.3 times the VIX, a measure of volatility of the S&P 500 index. NXPI’s volatility stands in the 33rd 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

NXPI peaked on June 1 at $114 and reversed to the downside, ending a rise that began in October 2011. The stock has produced two bull signals since the peak Both were unsuccessful, on average losing 11.3% over 22 days.

Although the price has been rising since Oct. 29, immediately after an earnings announcement, I judge the movement to be a countertrend correction that will reverse to the downside before reaching $98.09. A break above $98.09 would invalidate my reading of the chart.

The chart is ambiguously bearish: A nearer-term uptrend within a longer-term downtrend.

Set against the bearishness stands the opinion of 15 analysts covering NXPI. Collectively, they come down at an extremely high enthusiasm index of 73%, with 87% giving NXPI a Strong Buy recommendation.

And yet, back in the bear column, Zacks Investment Research gives NXPI an extremely bearish rank of 5. Zacks rank is calculated from earnings estimate revisions.

In part, NXPI's rise is news driven. On Nov. 24 it received a regulatory clearance to sell part of its business. (Read about it here.) That's news report isn't decisive enough to trigger by man on trading news, but it does create a strong likelihood that further news reports will be followed by sudden price moves.

The NXPI picture is ambiguity compounded, which fits the model for a time spread, such as a covered call, a calendar spread or a diagonal. I shall use the diagonal structure in building a trade.

Diagonal spread, long the $87.50 calls expiring July 16, 2016 
and short the $90 calls expiring Jan. 17,
bought with a credit.
Probability of expiring out-of-the-money


For the long leg, the premium is a $13.70 debit, and for the short leg, a $5.30 credit, for a net $8.40 debit. The stock at the time of entry was priced at $90.96.

Decision for My Account

I've entered a position on NXPI as described above. There is some news risk, and my judgement is that it will balance the bearish cast of the chart, making a diagonal a reasonable strategy.

-- Tim Bovee, Portland, Oregon, Nov. 30, 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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