Thursday, April 14, 2016

STX Analysis

Update 4/19/2016: STX reached 51% of its potential and I exited for the profit.

Shares declined by 6.8% over five days, or a -497% annual rate. The options position produced a 103.1% yield on debit for a +7,528% annual rate.

The data-storage hardware maker Seagate Technology PLC (STX), with operations headquartered in Cupertino, California publishes earnings on Friday before the opening bell.
[STX in Wikipedia]


I shall use the MAY series of options, which trades for the last time 36 days hence, on May 20.


Implied volatility stands at 64%, which is 4.7 times the VIX, a measure of volatility of the S&P 500 index. STX’s volatility stands in the 85th percentile of its most recent range. The price used for analysis was $27.61.

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

STX has been in a strong downtrend since December 2014. It hit a low on Jan. 28 and then bounced. The downward movement resumed on March 22 and today plummeted with a $4+  opening gap after the company issued a financial warnings.

Brokerages on average give STX a miserable negative 68% enthusiasm rating, with only 14% of 22 analysts issuing strong buy recommendations.

STX has closed higher only once in the first trading session after the last four earnings announcements.

This is a bearish picture. The main risk is an upward reaction as the buy-low crowd swarms in searching for bargains. If that happens I expect the rise to be short lived and am willing to take the risk.

Bear call spread, short the $28 calls and long the $30 calls,
sold for a credit and expiring May 21.
Probability of expiring out-of-the-money


The premium is $0.65, which is 33% of the width of the position’s wings. The share price was $27.44 at entry.

The risk/reward ratio is 2:1.

The zone of profit in the proposed trade covers a 56-cent move to the upside and all prices to the downside. The biggest immediate move after each of the past four earnings announcements was $4.92, and the average was $2.61. After eliminating the maximum and minimum post-earnings movements, the core tendency is $2.42.

Decision for My Account

It was a difficult fill and I had to lower my asking price significantly, by 8 cents, in order to obtain it. I have updated the analysis with the new figures.

The risk reward ratio is 0.3 higher. The probability of expiring out of the money is 3.0 percentage points higher. Premium as a percent of the width of the positions wings is 4 percentage points.

The trade still meets my standards so I'm quite comfortable with it, despite giving up a bit of potential profit.

-- Tim Bovee, Portland, Oregon, April 14, 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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