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 Salesforce.com (CRM), headquartered in San Francisco, California, publishes earnings on Wednesday after the closing bell.
[CRM in Wikipedia]
CRM
I shall use the MAR series of options, which trades for the last time 51 days hence, on April 17.
Ranges
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.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 74.48 | 87.71 | 68.62 |
| Lower | 48.02 | 34.79 | 53.88 |
| Gain/loss | ±$13.23 | ±$26.46 | ±$7.37 |
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.
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
| APR | Strike | OTM |
|---|---|---|
| Upper | 70 | 83.3% |
| Lower | 52.5 | 73.3% |
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
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