Tuesday, February 2, 2016

MDLZ Analysis

The snack food and beverage company Mondelez International Inc. (MDLZ), headquartered in  Deerfield, Illinois, publishes earnings on Wednesday before the opening bell.
[MDLZ in Wikipedia]


I shall use the MAR series of options, which trades for the last time 45 days hence, on March 18.


Implied volatility stands at 35%, which is 1.7 times the VIX, a measure of volatility of the S&P 500 index. MDLZ’s volatility stands in the 66tb 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 share price used in analysis was $42.26.

The Trade

MDLZ has moved off to the downside from its peak set on Oct. 6, 2015 but remains well above the low since trading began on Feb. 2, 2015. The price hit an interim low on Jan. 20, reversed slightly, then came off of that interim high to resume the decline.

The company, once known as Kraft Foods Inc., was founded in 1923 but moved to a new stock symbol after a reorganization. Given the brevity of the history, I can't say whether MDLZ is a true downtrend or is simply retracing within an uptrend.

The share price has risen in the trading session immediately after three of the last four earnings announcements. Changes in analyst assessments suggest the likelihood of a positive earnings surprise, based on the model developed by Zacks Investment Research.

Brokerages in aggregate come down with a 44% enthusiasm index, with 63% of 18 analysts issuing strong buy recommendations.

The the discrepancy among the Zacks analysis, the brokerages and the chart, I'm going with a direction-neutral play.

Iron condor, short the $46 calls and long the $47 calls,
short the $36 puts and long the $35 puts,
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money

The premium is $0.21, which is 21% of the width of the position’s wings.

The risk/reward ratio is 3.8:1.

The zone of profit in the proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $2.17, and the average was $1.30 After eliminating the maximum and minimum post-earnings movements, the core tendency is $1.42.

Decision for My Account

Although the zone of profit nicely covers prior post-earnings moves, it fails by 25 cents to cover the one standard deviation range. And even if I were to hedge that fact, the risk/reward ratio is quite high. Given the expectation of an earnings surprise, I want that 1SD range covered fully, and I certainly want a better risk/reward ratio. I am rejecting this trade.

-- Tim Bovee, Portland, Oregon, Feb. 2, 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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Based on a work at www.timbovee.com.

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