Wednesday, February 24, 2016

CRM Analysis

Update 4/1/2016: I exited CRM as a loss after the price moved above the position's zone of profitability. 

The exit was triggered by my new policy of exiting when a position's loss exceeds 150% of maximum potential profit. In CRM's case, near the close today that loss is at 169% of the max.

Shares gained 24.2% over 37 days, or a +230% annual rate. The options position produced a 62.8% loss on debit for a -620% annual rate.

The cloud computing and customer relationship management company (CRM), headquartered in San Francisco, California, publishes earnings on Wednesday after the closing bell.

[CRM in Wikipedia]


I shall use the MAR series of options, which trades for the last time 51 days hence, on April 17.


Implied volatility stands at 58%, which is 2.6 times the VIX, a measure of volatility of the S&P 500 index. CRM’s volatility stands in the 63rd percentile of its most recent range. The price used for analysis was $61.25.

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

The Trade

CRM has been in a downtrend since Nov. 19, 2015. It reversed to the upside in a counter-trend correction on Feb. 9 but remains well below last year's peak.

All of the last four earnings announcements closed higher the next trading day.

Brokerages in aggregate give CRM a 74% enthusiasm index with 84% of 31 analysts issuing strong buy recommendations.

I shall go with a direction-neutral strategy but skew it to provide a larger profit zone to the upside compared to the downside.

Iron condor, short the $70 calls and long the $72.50 calls,
short the $52.50 puts and long the $40 puts,
sold for a credit and expiring April 18.
Probability of expiring out-of-the-money

The premium is $0.81, which is 32% of the width of the position’s wings. The stock at the time of entry was priced at $60.58.

The risk/reward ratio is 2.1:1.

The zone of profit in the proposed trade covers a $8.75 move either way. The biggest immediate move after each of the past four earnings announcements was $7.37, and the average was $3.69. After eliminating the maximum and minimum post-earnings movements, the core tendency is $3.02.

Decision for My Account

I have opened a position on CRM as described above.

-- Tim Bovee, Portland, Oregon, Feb. 24, 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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