Monday, November 23, 2015

QIHU Analysis

Update 12/2/2015: QIHU attained 57% of its potential profit, and I exited for a profit. The company publishes earnings Dec. 8 so I may be back into this stock within a week.

Shares rose by 5.0% over nine days, or a +204% annual rate. The options position produced a 130.8% yield on debit for a +5,303% annual rate.

The Internet services company Qihoo 360 Technology Co. Ltd. (QIHU), headquartered in Beijing, China, publishes earnings on Monday after the closing bell.

[QIHU in Wikipedia]


I shall use the JAN series of options, which trades for the last time 53 days hence, on Jan. 16.


Implied volatility stands at 51%, which is 3.2 times the VIX, a measure of volatility of the S&P 500 index. QIHU’s volatility stands in the 77th percentile of its annual range. In calculating the percentile I threw out the Aug. 24 China Panic implied volatility, which was a strong outlier.

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

The Trade

QIHU has been in a rising trend since Sept. 14, and the trend is confirmed by analysts enthusiasm index, which is quite high a 67%. Of the analysts covering QIHU, 83% have a strong buy recommendation.

However, Zacks Investment Research, which I use as a guide in selecting a strategy, is neutral toward QIHU, with a rank of 3 and no expectation of an earnings surprise.

Earnings are as likely to produce a price rise as a price decline.

Despite Zacks' assessment, the chart and the analyst expectation dispose me toward a bull play, hedged on the downside as much as the risk and return will allow.

Bull put spread, short the $62.50 puts and long the $62 puts,
sold for a credit and expiring Jan. 17.
Probability of expiring out-of-the-money

The premium is $0.60, which is 24% of the width of the position’s wing. The stock at the time of entry was priced at $66.87.

The risk/reward ratio is 3.2:1.

The short strike provides a zone of profit that covers a $4.37 move to the downside. The biggest immediate move after each of the past four earnings announcements was $5.28, and the average was $3.60.

Decision for My Account

I have entered a position on QIHU as described above.

-- Tim Bovee, Portland, Oregon, Nov. 23, 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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