The airline company American Airlines Group Inc. (AAL), headquartered in Fort Worth, Texas, publishes earnings on Friday before the opening bell.
[AAL in Wikipedia]
I shall use the MAR series of options, which trades for the last time 50 days hence, on March 18.
Implied volatility stands at 50%, which is 2.1 times the VIX, a measure of volatility of the S&P 500 index. AAL’s volatility stands in the 81st percentile of its most recent range. The stock price used in analysis is $38.52
AAL has limited chart history since going public in December 2013 as a reorganized company. The stock has been trending downward since January 2015 but remains above both its IPO price and a major low set in October 2014. At this point I would judge the chart as showing an uptrend undergoing a counter-trend correction.
Two of the last four earnings announces have been followed by a higher close to the next trading session.
Changes in analyst assessments suggest the likelihood of a positive earnings surprise, based on the method used by Zacks Investment Research, which the company says is accurate 70% of the time.
Brokers in aggregate give AAL a 17% enthusiasm index, with 58% of 12 analysts issuing strong buy recommendations.
The preponderance of the evidence suggests a bull play to me, and I shall structure the position as a bull put options spread.
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money
The risk/reward ratio is 2:1.
The zone of profit in the proposed trade covers a $1.88 move to the downside and is profitable without a boundary to the upside. The biggest immediate move after each of the past four earnings announcements was $15.66, and the average was $7.64. After eliminating the maximum and minimum post-earnings movements, the core tendency is $7.28.
Decision for My Account
I have entered a position on AAL as described above.
-- Tim Bovee, Portland, Oregon, Jan. 28, 2016
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.
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