Tuesday, January 26, 2016

HES Analysis

Update 3/15/2016: I exited HES for a loss after an assignment as expiration neared. 

The assignment of the $40 short calls placed short shares of HES in my account for a $40 per share credit. I in turn sold the shores for $48.27 a share and exited the long calls for a $5.83 per share credit.

During the lifespan over the position shares rose by 36.5% over 49 days, or a +472% annual rate. The options position, including the assigned shares, produced a 3.7% loss on debit for a -27% annual rate.

The oil and natural gas exploration and production company Hess. Corp. (HES), headquartered in New York City, publishes earnings on Wednesday before the opening bell.

[HES in Wikipedia]


I shall use the MAR series of options, which trades for the last time 52 days hence, on March 18.


Implied volatility stands at 75%, which is 3.2 times the VIX, a measure of volatility of the S&P 500 index. HES’s volatility stands at the peak of its most recent range. The price used for analysis was $35.74.

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

The Trade

Some people are dog people; some are cat people. To trade oil stocks on HES, you've got to love bears. The sector has been declining furiously since June 2014, and despite a couple of counter-trend corrections, it has yet to level out. Any trader in oil will be bearish; the fear each must feel is that they will be wiped out by a sudden reversal prompted by policy decisions made in Riyadh or Tehran.

The most recent leg down began Oct. 9, 2015. It reversed, slightly, on Jan. 20, but then after a few days turned back to the downside. The beta stands at 1.76, meaning that HES correlates with the S&P 500, but with much wider moves.

The pattern of change in analyst expectations suggests the strong likelihood of a negative earnings surprise. Analysts in aggregate come down at a negative 6% enthusiasm index, with 44% of 16 analysts issuing strong buy recommendations.

This is a difficult grid to work with, since open interest is clumped around fewer strike prices than normal. For example, for calls the three-digit open interest jumps from a 74% probability of expiring out of the money to an 88% probability; for calls the jump is from 76% to $88%.

That makes it difficult to build an iron condor. But I can make a bear call spread work.
Bear call spread, short the $40 calls and long the $42.5 calls,
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money

The premium is $0.60, which is 24% of the width of the position’s wings. The stock at the time of entry was priced at $35.33.

The risk/reward ratio is 3.1:1.

The zone of profit in the proposed trade covers a $4.26 move above the strike price and is profitable without a boundary to the downside. The biggest immediate move after each of the past four earnings announcements was $5.59, and the average was 1.79. After eliminating the maximum and minimum post-earnings movements, the core tendency is $0.70. The zone of profit fails to cover the maximum move from provides excellent coverage of the average and core tendency.

Decision for My Account

I've opened a position on HES as described above.

-- Tim Bovee, Portland, Oregon, Jan. 26, 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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Based on a work at www.timbovee.com.

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