During the lifetime of the position, shares lost 2.1% over 14 days, or a -54% annual rate. The options position produced a 181.8% yield on debit for a +4,740% annual rate.
The pharmaceutical company Teva Pharmaceutical Industries Ltd. (TEVA), headquartered in Petah Tikva, Israel, closed on Wednesday with sufficiently high implied volatility to warrant further analysis.
[TEVA in Wikipedia]
I shall use the SEP series of options, which trades for the last time 36 days hence, on Sept. 16.
Implied volatility stands at 42%, which is 3.6 times the VIX, a measure of volatility of the S&P 500 index. TEVA’s volatility stands in the 54th percentile of its annual range. The price used for analysis was $52.95.
|Week||SD1 68.2%||SD2 95%||Earns|
TEVA peaked on July 28, 2015 and began an unrelenting slow decline. Using Elliott wave analysis, I read it as being the first wave of a downward correction. More formally, my count is a 5th wave down from Aug. 3 within an A wave of higher degree from July 2015.
by Martin Ford
As is almost always the case with Elliott, there is sufficient ambiguity to cast doubt on the shorter-term direction.
The short-term MACD histogram is declining, and the price yesterday crossed below the longer-term 50-day moving , buttressing the argument for a downward move, although it moved back above the MA today.
The slope of the decline isn't steep, so I'm going to accommodate the ambiguity with a sideways play, skewed somewhat to the downside to also accommodate the longer-term downward trend..
short the $45 puts and long the $42.50 puts,
sold for a credit and expiring Sept. 17.
Probability of expiring out-of-the-money
The premium is $0.63, which is 25% of the width of the position’s wings. The stock at the time of entry was priced at $53.00.
The risk/reward ratio is 3:1.
The zone of profit in the proposed trade covers a $6.25 move either way.
Decision for My Account
I have entered a position on TEVA as described above. My exit point for a profit is a premium of $0.31, and for a loss, of $1.26.
-- Tim Bovee, Portland, Oregon, Aug. 11, 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.
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