Thursday, August 18, 2016

AMAT Analysis

Update 10/11/2016: AMAT toyed with the upper boundary of its profit zone from the beginning of my entry into the direction neutral position. It moved into profitable territory on Oct. 10, accelerating the next day, and I exited at 59% of the maximum potential profit.

Shares rose by 4.4% over 54 days, or a +30% annual rate. The options positon produced a +146.2% yield on debit for a +988% annual rate.

The manufacturer of semiconductors and other computing components Applied Materials Inc. (AMAT), headquartered in Santa Clara, California, publishes earnings on Thursday after the closing bell.

[AMAT in Wikipedia]


I shall use the OCT series of options, which trades for the last time 64 days hence, on Oct. 21.


Implied volatility stands at 35%, which is triple the VIX, a measure of volatility of the S&P 500 index. AMAT’s volatility stands in the 41st  percentile of its annual range. The price used for analysis was $27.40.

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

How to consistently Beat the Market: Zacks Proven Formula for Making 26% a Year for More than Two Decades
by Mitch Zacks

The Trade

AMAT peaked with the tech bubble at the turn of the century and has meandered sideways ever since.

The most recent leg up, beginning in September 2015, has carried the price above the ceiling of the sideways channel and so may, just possibly, represent an upside breakout and the beginning of a rising trend. Or not. It's too early to say.

Recent changes in analyst assessments create no expectation of an upside earnings surprise.

Brokers in aggregate give AMAT a 59% enthusiasm rating, with 76% of 17 analysts issuing strong-buy recommendations. It presents an extremely bullish picture.

AMAT has risen immediately after three of the last four earnings announcements.

I shall use a neutral strategy, with the profit zone expanded to the upside.

Iron condor, short the $30 calls and long the $31 calls,
short the $25 puts and long the $24 puts,
sold for a credit and expiring Oct. 22.
Probability of expiring out-of-the-money

The premium is $0.32, which is 32% of the width of the position’s wings.

The risk/reward ratio is 2:4.

The zone of profit in the proposed trade covers a $2.50 move either way. The biggest immediate move after each of the past four earnings announcements was $2.75, and the average was $1.30. After eliminating the maximum and minimum post-earnings movements, the central tendency is $0.96.

Decision for My Account

I've entered a position on AMAT as described above. The stock at the time of entry was priced at $27.64.
-- Tim Bovee, Portland, Oregon, Aug. 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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