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.
|Week||SD1 68.2%||SD2 95%||Earns|
by Euan Sinclair
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.
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 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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