The earnings announcement after the closing bell on Oct. 20 produced a $6.50 downward gap in the stock price, carrying it from the middle region of the zone of profit down to the very edge of profitability, $39, and there it meandered throughout the day, zigging into the money and a near certain assignment of my options producing a loss, then zagging out of the money and maximum profit.
Most of my trades are bloodless exercises in calculating chance. Rarely to I see such drama in the end game.
At the end, in after-market trading, EBAY ended the day six cents out of the money, and I booked maximum profit, which means I kept all of the premium received when I sold the short options 39 days before without incurring a cost. Mathematically, it is an infinite profit.
Shares declined by 9.0% over 39 days, or a -84% annual rate.
So was I wise to stay the course, even the the end game was a random walk, a toss of the dice? Or -- win or lose -- did I play it by the book?
Tom Sosnoff, who founded ThinkOrSwim, the company that brought professional level options analysis to the individual trader's laptop, and who later founded two other educational companies, TastyTrade and Dough, says this often when discussing options trading (I paraphrase): Any trader who entered a defined loss position [a vertical spread or iron condor, for example] presumably is prepared to accept that full loss.
In my world, and perhaps Sosnoff's as well, a trader who defines a loss and then cracks under the prospect of having to actually take it is not being true to the practice of trading. That kind of trader is acting an amateur, not a pro.
So I conclude that I played the positions well, and would conclude the same had the stock closed 7 cents lower, prompting a loss-making assignment.
The online auction house eBay Inc. (EBAY), headquartered in San Jose, California, showed implied volatility in the upper half of its one-year range, qualifying for a further look and possibly a trade.
[EBAY in Wikipedia]
EBAY
I shall use the OCT series of options, which trades for the last time 38 days hence, on Oct. 21.
Ranges
Implied volatility stands at 36%, which is !0 times the VIX, a measure of volatility of the S&P 500 index. !sym ’s volatility stands in the 53rd percentile of its annual range. The price used for analysis was $31.82.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 35.53 | 39.24 | N/A |
| Lower | 28.11 | 24.40 | N/A |
| Gain/loss | ±$3.71 | ±$7.42 |
The Trade
EBAY today again reached an all-time high in the climb that began on June 27. Elliott wave analysis suggests that shorter-term uptrend is in its 5th and final wave before a correction ensures. As always, Elliott says nothing about timing.
The price is off a bit in trading today
The company is ranked neutral by Zacks Investment Research.
Given the late stage of the rise, I'm unwilling to commit to bull play. I shall attempt a direction neutral strategy, the iron condor.
short the $29 puts and long the $28 puts,
sold for a credit and expiring Oct. 22.
Probability of expiring out-of-the-money
| OCT | Strike | OTM |
|---|---|---|
| Upper | 34 | 75.6% |
| Lower | 29 | 77.6% |
The risk/reward ratio is 1.9:1.
The zone of profit in the proposed trade covers a $2.50 move either way.
Decision for My Account
I've entered a position on EBAY as described above. The stock at the time of entry was priced at $31.94.
-- Tim Bovee, Portland, Oregon, Oct. 13, 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
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
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