Monday, April 18, 2016

HOG Analysis

Update 4/27/2016: HOG moved sharply to the upside after earnings were published, putting my bear call spread on the wrong side of the market. I held on for seven trading days hoping for a pullback, which never materialized. I exited once the price moved 160% below its maximum profit point.

Shares rose by 5.2% over nine days, or a +210% annual rate. The options position produced a 37.4% loss on debit for a -1,517% annual rate

The motorcycle manufacturing and retail sales company Harley-Davidson Inc. (HOG), headquartered in Milwaukee, Wisconsin, publishes earnings on Monday after the closing bell.

[HOG, in Wikipedia]


I shall use the MAY series of options, which trades for the last time 32 days hence, on May 20.


Implied volatility stands at 51%, which is 3.7 times the VIX, a measure of volatility of the S&P 500 index. HOG’s volatility stands at the peak of its most recent range. The price used for analysis was $47.06.

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

A book from my library →

The Trade

HOG attained an all-time high in May 2013 and then began a long undulating decline, reaching a low on Feb. 11. Subsequently, the price rose to a peak on April 4, at the about the level of the Oct. 9, 2015 peak of its most recent leg down.

The price dipped slightly and then rose again in the past two weeks while remaining below the April 4 peak.

HOG's price has risen in the first trading session following three of the last four earnings announcements.

Brokerages in aggregate give HOG a negative 50% enthusiasm index, with 22% of 18 analysts issuing strong buy recommendations.

I see HOG as a bear trade based primarily on the chart but backed by brokerage opinion. The bullish record on post-earnings price increases was established prior to the April 4 peak. The trend has changed since then.

Bear call spread, short the $47.50 calls and long the $50 calls,
sold for a credit and expiring May 21.
Probability of expiring out-of-the-money


The premium is $0.92, which is 37% of the width of the position’s wings. The stock at the time the order was placed was priced at $46.87.

The risk/reward ratio is 1.7:1.

The zone of profit in the proposed trade covers a $0.63 move above the strike price. The biggest immediate move after each of the past four earnings announcements was $7.80, and the average was $4.63. After eliminating the maximum and minimum post-earnings movements, the core tendency is $4.65.

Decision for My Account

I have opened a position on HOG as described above. I had to lower my price from 99 cents to 92 cents in order to get a fill, improving the odds of a profitable trade somewhat while worsening the risk/reward ratio slightly.

-- Tim Bovee, Portland, Oregon, April 18, 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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