The investment bankers Goldman Sachs Group Inc. (GS), headquartered in New York City, publishes earnings on Wednesday before the opening bell.
[GS in Wikipedia]
GS
I shall use the FEB series of options, which trades for the last time 31 days hence, on Feb. 20.
Ranges
Implied volatility stands at 36%, which is 1.4 times the VIX, a measure of volatility of the S&P 500 index. GS’s volatility stands in the 83rd percentile of its most recent range.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 174.27 | 190.82 | 163.16 |
| Lower | 141.15 | 124.60 | 152.26 |
| Gain/loss | 10.5% | 21.0% |
The Trade
GS has been in a downtrend since June 2015 and began the present downward leg within that trend on Nov. 9, 2015.
Only one of the last four earnings announcements has resulted in a price increase the next trading day.
Brokerages collectively come down with a negative 31% enthusiasm rating. Out of the 13 analysts, 31% are issuing strong-buy recommendations. (It's no typo -- the rating and the strong-buy percentage are identical.)
I shall hedge the trade on both to the upside and the downside.
Alternative #1:
short the $140 puts and long the $135 puts,
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money
| FEB | Strike | OTM |
|---|---|---|
| Upper | 170 | 83.4% |
| Lower | 140 | 87.4% |
The risk/reward ratio is 3.4:1.
The zone of profit in the proposed trade covers a $15 move either way. The biggest immediate move after each of the past four earnings announcements was $5.45, and the average was $2.35. The central tendency, after removal of the maximum and minimum movements, was $1.52
That gives a far wider profit range than history suggests the trade requires. Here's an alternative set up.
Alternative #2:
short the $145 puts and long the $140 puts,
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money
| FEB | Strike | OTM |
|---|---|---|
| Upper | 165 | 73.6% |
| Lower | 145 | 74.6% |
The premium is $1.85, which is 37% of the width of the position’s wings. The stock at the time of entry was priced at $157.12.
The risk/reward ratio is 1.7:1.
The zone of profit in the proposed trade covers a $10 move either way, still nearly double the maximum post-earnings movement.
Decision for My Account
I have opened a position on GS as described above in Alternative #2, with a fill 5 cents below my original ask. I've updated the figure above with the actual fill.
-- Tim Bovee, Portland, Oregon, Jan. 19, 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
Two social media feeds provide notification whenever something new is posted.
- On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
- On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader
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.
No comments:
Post a Comment