[CBS in Wikipedia]
CBS
I shall use the MAR series of options, which trades for the last time 36 days hence, on March 18.
Ranges
Implied volatility stands at 57%, which is double the VIX, a measure of volatility of the S&P 500 index. DIS’s volatility stands at the peak of its most recent range. The price used in analysis was $42.47.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 50.04 | 57.62 | 44.53 |
| Lower | 34.90 | 27.32 | 40.41 |
| Gain/loss | ±$7.57 | ±$15.15 | ±$2.06 |
The Trade
CBS has been in a downtrend since March 2014. The most recent leg down began in May 2015, hit a lower low on Sept. 28, 2015, and then retraced a portion of the decline in what appears to be a sideways correction within a downtrend. It is a bearish chart.
Two of the last four earnings announcement were followed the next trading session with higher prices.
Brokers collectively come down with a 45% enthusiasm index, with 68% of 22 analysts issuing strong buy recommendations.
I shall use a direction-neutral strategy for this play.
short the $35 puts and long the $32.50 puts,
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money
| MAR | Strike | OTM |
|---|---|---|
| Upper | 47.5 | 80.7% |
| Lower | 35 | 83.0% |
The premium is $0.55, which is 22% of the width of the position’s wings. My ideal percentage of width is 33%, so that metric is low. The stock at the time of entry was priced at $x.xx.
The risk/reward ratio is 3.5:1, which is higher than my 3:1 maximum.
The zone of profit in the proposed trade covers a $3.75 move either way, which is sufficient to cover the post-earnings ranges. The biggest immediate move after each of the past four earnings announcements was $2.06, and the average was $1.43. After eliminating the maximum and minimum post-earnings movements, the core tendency is $1.11. It is, however, way narrower than the one standard deviation range.
The options grid doesn't allow much flexibility. Moving the short puts in one strike to $37.50 puts creates a 74% chance of expiring out of the money to the downside, which is far lower than I like. Moving the calls in on the calls side creates a 68% of expiring OTM, which is way too narrow.
Decision for My Account
Given the metrics described above and the lack of flexibility on the options grid, I am declining to take a trade on CBS.
-- Tim Bovee, Portland, Oregon, Feb. 11, 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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