Monday, February 1, 2016

EMR Analysis

Update 3/15/2016: I exited EMR for a loss as expiration neared.

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.

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

The stock price used for analysis was $45.42

The Trade

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.
Bear call spread, short the $46 calls and long the $48 calls,
sold for a credit and expiring Feb. 21.
Probability of expiring out-of-the-money

The premium is $0.70, which is 35% of the width of the position’s wings. The stock at the time of entry was priced at $45.39.

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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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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