LB Analysis

Update 8/8/2016: LB rose above the upper boundary of the iron condor position, and I exited for a loss two weeks prior to expiration.

Shares rose by 13.7% over 42 days, or a +119% annual rate. The options position produced a 65.4% loss son debit for a -568% annual rate.

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L Brands Inc. (LB), headquartered in Columbus, Ohio and the parent company of intimate apparel retailer Victoria's Secret and the keep-clean-and-groomed retailer Bath & Body Works, closed Friday with sufficiently high implied volatility by my standards to qualify for a closer look.

[LB in Wikipedia]

LB

I shall use the AUG series of options, which trades for the last time 53 days hence, on Aug. 19.

Ranges

Implied volatility stands at 37%, which is 1.4 times the VIX, a measure of volatility of the S&P 500 index. LB’s volatility stands in the 87th percentile of its most recent range. The price used for analysis was 65.38.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	74.62	83.66	N/A
Lower	58.14	46.90	N/A
Gain/loss	±$9.24	±$18.48

Implied volatility 1 and 2 standard deviations; central tendency earns move

Visual Guide to Elliott Wave Trading by Wayne Gorman

The Trade

LB peaked in November 2011 and swung into a rapid decline. The trend is stair-stepping down. Given the sharp decline after the U.K. voted to leave the European Union, I shall use a direction neutral strategy as a hedge against a counter-reaction to the decline.

Iron condor, short the $73 calls and long the $75.50 calls,
short the $55 puts and long the $53 puts,
sold for a credit and expiring Aug. 20.
Probability of expiring out-of-the-money

AUG	Strike	OTM
Upper	73	85.4%
Lower	55	88.4%

The premium is $0.45, which is 40% of the width of the position’s wings. The stock at the time of entry was priced at $65.21.

The risk/reward ratio is 3.9:1.

The zone of profit in the proposed trade covers a $9 move either way.

Decision for My Account

I've opened a position on LB as described above.

-- Tim Bovee, Portland, Oregon, June 27, 2016

References

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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Disclaimer

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.

License



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Based on a work at www.timbovee.com.