Thursday, December 3, 2015

AMBA Analysis

Update 12/16/2015: AMBA reached 47% of its potential profit. I exited, even though it is a bit below my 50% guideline, in order to free funds for other trades.

Shares declined by 5.1% over 13 days, or a -142% annual rate. The options position produced an 87.5% yield on debit for a +2,457% annual rate.

The high-definition video semiconductor company Ambarella Inc. (AMBA), headquartered in Santa Clara, California, publishes earnings on Thursday after the closing bell.

[AMBA in Wikipedia]


I shall use the JAN series of options, which trades for the last time 43 days hence, on Jan. 16.


Implied volatility stands at 77%, which is 4.6 times the VIX, a measure of volatility of the S&P 500 index. AMBA’s volatility stands in the 66th 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

AMBA has been in a downtrend since July 23. It reversed to the upside on Nov. 2 in what is so far a very small counter-trend correction.

Elliott wave analysis shows that AMBA has completed three waves in its major decline from July. The present rise is a 4th wave correction, and once it is complete, AMBA will continue in its downward course.

The 2nd wave of the downtrend was a sharp zig-zag to the upside. Often the two corrective waves in a trend alternate, and the chart suggests that's the present 4th wave will likely be a sideways correction.

Zacks Investment Research gives AMBA a somewhat bear rank of 4, with no expectation of an earnings surprise. Twelve analysts covering the stock collectively come down with a bullish 17% enthusiasm rating, with 58% of them issuing Strong Buy recommendations.

Half of the earnings over the past year have been followed the next trading day by a rising stock price, and the other saw a falling price.

I shall build a direction neutral trade, using the iron condor structure, but shall skew it to the downside if I'm able.

Iron condor, short the $70 calls and long the $72.50 calls,
short the $42.50 puts and long the $40 puts,
sold for a credit and expiring Jan. 17.
Probability of expiring out-of-the-money


The premium is $0.75, which is 28% of the width of the position’s wings. The stock at the time of entry was priced at $59.89.

The risk/reward ratio is 2.3:1.

The zone of profit in the proposed trade covers a $13.25 move either way. The biggest immediate move after each of the past four earnings announcements was $6.19, and the average was $3.61.

Decision for My Account

I have opened a position on AMBA as described above.

-- Tim Bovee, Portland, Oregon, Dec. 3, 2015


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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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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