Monday, December 14, 2015

EMR Analysis

Update 1/8/2016: I exited EMR with one week left before expiration with profit at 48% of its potential, 2 percentage points short of my target.

Shares declined by 1.9% over 25 days, or a -28% annual rate. The options position produced a 93.2% yield on debit for a +1,360% annual rate.

The industrial engineering company Emerson Electric Co. (EMR), headquartered in Ferguson, Missouri, closed below its 20-day price channel. With high odds of a bear signal following through on the breakout and high implied volatility relative to the one-year range, EMR is a candidate for a bear call options spread.

[EMR in Wikipedia]


I shall use the JAN series of options, which trades for the last time 32 days hence, on Jan. 16.


Implied volatility stands at 31%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. EMR’s volatility stands in the 57th 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

EMR has completed two bear signals in the past 12 months, both of them profitable. On average they yielded 14.1% over 122 days. That record makes the stock a candidate for a bear play.

The price has been in  downtrend since May 21. It reversed from a low on Oct 1 in a countertrend movement lasting until Nov. 24, when it resumed its downward course. The price remains above its Oct. 21 low of $42.21.

Analysts give the stock a strongly negative enthusiasm index of -78%.

Bear call spread, short the $45 calls and long the $47 calls,
sold for a credit and expiring Jan. 17.
Probability of expiring out-of-the-money


The premium is $0.85 which is 42% of the width of the position’s wings. The stock at the time of entry was priced at $45.09.

The risk/reward ratio is 1.4:1.

The short strike is 45 cents, almost identical to the market price thanks to a last-minute move as I was placing the trade.

Decision for My Account

One complication is that earnings are scheduled for Feb. 2. That's sufficient time for a January spread to run its course but it limits potential rolls if the trade becomes un profitable.

Nonetheless, I entered a position on EMR as described above.

-- Tim Bovee, Portland, Oregon, Dec. 14, 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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