Wednesday, December 2, 2015

AVGO Analysis

Update 1/4/2016: AVGO reached 53% of its potential profit and I have exited the position.

Shares rose by 5.1% over 33 days, or a 57% annual rate. The options position produced a 114.3% yield on debit for a +1,264% annual rate.

The analog semiconductor company Avago Technologies Ltd. (AVGO), headquartered in San Jose, California and Singapore, publishes earnings on Wednesday after the closing bell.

[AVGO in Wikipedia]


I shall use the JAN series of options, which trades for the last time 44 days hence, on Jan. 16.


Implied volatility stands at 00%, which is 3.4 times the VIX, a measure of volatility of the S&P 500 index. AVGO’s volatility stands in the 54th 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

AVGO was in an uptrend from April 2013 until reaching a peak on June 1. It has since completed a wave down ending with the China Panic of Aug. 24, and then a corrective wave that appears to be trending sideways. Elliott wave analysis suggests that the next move will be to the downside.

All of the past four earnings announcements have been followed by price increases the next trading session.

Zacks Investment Research ranks AVGO as 3, which is neutral, and anticipates no earnings surprise.

The 21 analysts following AVGO collectively come down with a 67% enthusiasm rating, which is high, and 76% of them have issued a Strong Buy recommendation.

Given the lack of a clear directional trend on the chart, I shall use a direction-neutral iron condor for my trade.

Iron condor, short the $150 calls and long the $155 calls,
short the $110 puts and long the $105 puts,
sold for a credit and expiring Jan. 17.
Probability of expiring out-of-the-money


The premium is $1.50, which is 30% of the width of the position’s wings. The stock at the time of entry was priced at $133.86.

The risk/reward ratio is 2.7:1.

The zone of profit in the proposed trade covers a $20 move either way. The biggest immediate move after each of the past four earnings announcements was $16.57, and the average was $10.07.

Decision for My Account

I have opened a position on AVGO as described above.

-- Tim Bovee, Portland, Oregon, Dec. 2, 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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