Shares rose by 11.2% over 43 days, or a +95% annual rate. The options position produced a 65.0% loss on debit for a -552% annual rate.
The industrial engineering company Emerson Electric Co. (EMR), headquartered in Ferguson, Missouri, publishes earnings on Tuesday before the opening bell.
[EMR in Wikipedia]
I shall use the MAR series of options, which trades for the last time 46 days hence, on March 18.
Implied volatility stands at 38%, which is 1.8 times the VIX, a measure of volatility of the S&P 500 index. EMR’s volatility stands in the 92nd percentile of its most recent range.
|Week||SD1 68.2%||SD2 95%||Earns|
The stock price used for analysis was $45.42
EMR has been in a downtrend since December 2013. The most recent leg down ended Jan. 20 and began a retracement to the upside, which remains well below resistance. On the chart, EMR remains in a downtrend.
EMR has closed the post-earnings trading session higher in two out of the last four announcements.
Brokerages in aggregate give EMR negative 78% enthusiasm index, with 18% of 11 analysts issuing strong buy recommendations.
Given the agreement between the chart and the analysts, I'm inclined to go with a bearish directional trade on EMR.
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money
The risk/reward ratio is 1.8:1.
The zone of profit extends to $0.61 above the entry price and has no boundary to the downside. The biggest immediate move after each of the past four earnings announcements was $1.69, and the average was $1.14. After eliminating the maximum and minimum post-earnings movements, the core tendency is $1.19.
Decision for My Account
I have opened a position on EMR as described above.
-- Tim Bovee, Portland, Oregon, Feb. 1, 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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