VIAB Analysis

Update 11/16/2015: VIAB moved to 56% of its potential profit and I exited to avoid further time risk and to free funds for other opportunities.

Shares rose by 7.2% over five days, or a +526% annual rate. The options position produced a 125.0% yield on debit, for a +9,125% annual rate.

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The entertainment company Viacom Inc. (VIAB), headquartered in New York City, publishes earnings on Thursday before the opening bell.

[VIAB in Wikipedia]

VIAB

I shall use the DEC series of options, which trades for the last time 37 days hence, on Dec. 18.

Ranges

Implied volatility stands at 48%, which is triple the VIX, a measure of volatility of the S&P 500 index. VIAB’s volatility stands in the 87th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	55.74	63.13	55.66
Lower	40.96	33.57	41.04
Gain/loss	15.3%	30.6%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

I use freely available metrics from Zacks Investment Research for guidance in determining the direction of a trade. Zacks Ranks is 3, which is direction neutral. Zacks Expected Surprise Prediction is 0.66%.

Zacks says that a positive ESP with a neutral or bullish Rank produces a positive earnings surprise 70% of the time.

I shall therefore construct a bullish position.

Bull put spread, short the $47.50 puts and long the $45 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
	47.5	51.3%

The premium is $0.90, which is 36% of the width of the position’s wings. The stock at the time of entry was priced at $48.31.

The risk/reward ratio is 1.8:1.

The position is profitable at expiration $0.81 below the entry price. The biggest immediate move after each of the past four earnings announcements was $7.31, and the average was $3.26.

Decision for My Account

I've entered a position on VIAB as described above.

-- Tim Bovee, Portland, Oregon, Nov. 11, 2015

References

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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Disclaimer

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.

License



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Based on a work at www.timbovee.com.