Tuesday, July 5, 2016

WBA Analysis

Update 7/8/2016: WBA reached more than half of its potential profit and as is my practice, I took the money and ran.

Shares dropped sharply for two days after earnings came in below analysts' expectations.

Shares declined by 3.4% over three days, or a -416% annual rate. The options position produced a 102.7% yield on debit for a +12,496% annual rate.

The pharmacy and health/beauty productions company Walgreens Boots Alliance Inc. (WBA), headquartered in Deerfield, Illinois, publishes earnings on Wednesday before the opening bell.

[WBA in Wikipedia]


I shall use the AUG series of options, which trades for the last time 45 days hence, on Aug. 19.


Implied volatility stands at 34%, which is 2.1 times the VIX, a measure of volatility of the S&P 500 index. WBA ’s volatility stands in the 75th percentile of its annual range. The price used for analysis was $83.77.

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

Volatility Trading
by Euan Sinclair

The Trade

WBA peaked on Aug. 4, 2015 and began a downtrend that hit a low on Feb. 8. It has since retraced a portion of the decline, stopping just shy of the 61.8% Fibonacci level in a corrective pattern.

The price has risen twice out of the last four earnings announcements.

Brokers in aggregate give WBA a 25% enthusiasm rating, with 56% of 15 analysts issuing strong buy recommendations.

Everything points to a neutral position.

Iron condor, short the $90 calls and long the $92.50 calls,
short the $75 puts and long the $72.50 puts,
sold for a credit and expiring Aug. 20.
Probability of expiring out-of-the-money

The premium is $0.75 which is 20% of the width of the position’s wings. The stock at the time of entry was priced at $84.30.

The risk/reward ratio is 2.3:1.

The zone of profit in the proposed trade covers a $7.50 move either way. The biggest immediate move after each of the past four earnings announcements was $10.21, and the average was $4.59. After eliminating the maximum and minimum post-earnings movements, the central tendency is $3.30.

Decision for My Account

I have opened a position on WBA as described above.

-- Tim Bovee, Portland, Oregon, July 5, 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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