Tuesday, February 2, 2016

YHOO Analysis

The information company Yahoo! Inc. (YHOO), headquartered in Sunnyvale, California, publishes earnings on Tuesday after the closing bell.
[YHOO 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 52%, which is 2.4 times the VIX, a measure of volatility of the S&P 500 index. YHOO’s volatility stands in the 75th 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 price used for analysis was 28.78.

The Trade

YHOO has been in a downtrend since November 2014. The most recent leg down began on Dec. 2, 2015. It remains above the low point of the present downtrend.

Two out of the past four earnings announcement have been followed the next trading session by a stock price increase.

Brokers in aggregate give YHOO a 28% enthusiasm index, with 59% of 29 analysts issuing strong buy recommendations.

I shall structure the trade to be direction neutral.

Iron condor, short the $33 calls and long the $34 calls,
short the $24 puts and long the $23 puts,
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money

The premium is $0.28, which is 28% of the width of the position’s wings. The stock at the time of entry was priced at $x.xx.

The risk/reward ratio is 2.6:1.

The zone of profit in the proposed trade covers a $4.50 move either way. The biggest immediate move after each of the past four earnings announcements was $6.48, and the average was $4.28. After eliminating the maximum and minimum post-earnings movements, the core tendency is $4.47.

Decision for My Account

The difficulty with YHOO is the width of prior post-earnings moves. The best I can do with a reasonable risk/reward ratio fails to cover the maximum move and just barely covers the core tendency.

Also, the trade with fails to cover the one standard deviation range. I've fudged on that before but if I'm honest with myself, that coverage ought to be non-negotiable.

The price is low, a bit below $30, so I'll need to sell a larger number of contracts, which increases my overhead. All in all, this is not a trade I like. I'm rejecting it.

-- 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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