Thursday, January 28, 2016

AAL Analysis

Update 2/17/2016: AAL reached 52% of its potential and I exited for a profit. Shares rose by 5.1% over 19 days, or a +98% annual rate. The options position produced a 106.3% yield on debit for a +2,041% annual rate.

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

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

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.

Bull put spread, short the $36 puts and long the $35 puts,
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money
The premium is $0.33, which is 33% of the width of the position’s wings. The stock at the time of entry was priced at $37.88.

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.
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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