GPS Analysis

Update 9/2/2016: GPS rose after I entered the position, peaking on Aug. 22 at 19 cents above the profit zone, and then dropped back, reaching profitability as implied volatility declined. I exited at 51% of maximum potential profit.

Shares declined by 3.5% over 21 days, or a -61% annual rate. The options position produced a 105.9% yield on debit for a +1,840% annual rate.

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The clothing retailer The Gap Inc. (GPS), headquartered in San Francisco, California, is showing high implied volatility relative to the annual range compared to other prospects, although in absolute terms IV is on the low side.

[GPS in Wikipedia]

GPS

I shall use the SEP series of options, which trades for the last time 35 days hence, on Sept. 16.

Ranges

Implied volatility stands at 42%, which is 3.7 times the VIX, a measure of volatility of the S&P 500 index. GPS’s volatility stands in the 54th percentile of its annual range. The price used for analysis was $25.17.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	28.32	31.46	N/A
Lower	22.02	18.88	N/A
Gain/loss	±$3.15	±$6.29

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

GPS has been moving upward since May 18, a counter-trend rally within a decline that began in July 2014. An alternative analysis would have the most recent rise the beginning of a new uptrend, but by my count it would take a break above resistance at $30 to confirm that argument.

For the Love of Money: A Memoir by Sam Polk

The MACD histogram is trending down below the zero-line. The price remains above the 50-day moving average.

Given the ambiguities of the near-term trend, I shall use a direction neutral strategy.

Iron condor, short the $27 calls and long the $28 calls,
short the $23 puts and long the $22 puts,
sold for a credit and expiring Sept. 17.
Probability of expiring out-of-the-money

AUG	Strike	OTM
Upper	27	85.3%
Lower	23	86.0%

The premium is $0.35, which is 35% of the width of the position’s wings. The stock at the time of entry was priced at $24.99.

The risk/reward ratio is 1.9:1.

The zone of profit in the proposed trade covers a $4.00 move either way.

Decision for My Account

I have entered a position on GPS as described above. I had to order my ask by 3 cents in order to get a fill raising the risk/reward ratio from 1.6:1 to 1.9:1

-- Tim Bovee, Portland, Oregon, Aug. 12, 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.