[BIIB in Wikipedia]
BIIB
This analysis is for a roll forward of a series that has existed since October 2015, but since the roll is keyed to earnings, I shall file this separate analysis. I'll also update the original analysis and shall maintain it as the primary record.
For this roll forward, I shall use the FEB series of options, which trades for the last time 24 days hence, on Feb. 20. I'm using the earlier series because the MAR series has insufficient open interest to support the trade.
Ranges
Implied volatility stands at 46%, which is double the VIX, a measure of volatility of the S&P 500 index. BIIB’s volatility stands in the 96th percentile of its most recent range. The price used for analysis is $258.55.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 303.85 | 349.15 | 388.80 |
| Lower | 213.25 | 167.95 | 128.30 |
| Gain/loss | ±$45.30 | ±$90.60 | ±$130.25 |
The Trade
BIIB has been in a downtrend since March 2015, although it has been in a sideways pause since Aug. 21, 2015. The most recent leg, to the downside, began Dec. 29, 2015. The beta is 0.88, meaning that BIIB tends to correlate with the S&P 500 but narrower moves.
Two of the past four earnings announcements have resulted in a price increase in the next trading session.
The pattern of changing analyst recommendations suggests the likelihood of an upside earnings surprise, which is contrary to the bear call spread that I'm rolling forward. Analysts in aggregate give BIIB a 22% enthusiasm rating -- on the high side -- with 57% of 23 analysts issuing a strong buy recommendation.
Given the expectation of a positive earnings surprise, I shall further hedge my bear call spread with an bull put spread, creating an iron condor that provides a wider zone of the profit in both directions.
short the $235 puts and long the $230 puts,
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money
| FEB | Strike | OTM |
|---|---|---|
| Upper | 285 | 79.1% |
| Lower | 235 | 78.5% |
The risk/reward ratio is 1.7:1.
The zone of profit in the proposed trade covers a $25 move either way. The biggest immediate move after each of the past four earnings announcements was $130.25, and the average was $62.91. After eliminating the maximum and minimum post-earnings movements, the core tendency is $55.42.
Decision for My Account
The best zone of profit I can get leaves the prior post-earnings moves largely uncovered, even the core tendency. It fails to cover the one standard deviation range. Widening the range moves the potential loss beyond what I'm willing to take.
I'm passing on this roll and, after earnings are announced, will look to roll forward as a bear call spread or to exit the series for a loss.
-- Tim Bovee, Portland, Oregon, Jan. 26, 2016
References
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.
Alerts
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Disclaimer
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.License
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
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