ABT Analysis

Udate 10/25/2016: ABT reached 50% of its potential profit and I exited.

Shares declined by 3.0% over seven days, or a -158% annual rate. The options position produced a 100.0% yield on debit for a +214% annual rate.

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The pharmaceutical house Abbott Laboratories (ABT), headquartered in Lake Bluff, Illinois, publishes earnings on Wednesday before the opening bell.

[ABT in Wikipedia]

ABT

I shall use the NOV series of options, which trades for the last time 31 days hence, on Nov. 18.

Ranges

Implied volatility stands at 29%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. ABT’s volatility stands in the 73rd percentile of its annual range. The price used for analysis was $41.04.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	44.51	47.98	41.70
Lower	37.57	34.10	40.39
Gain/loss	±$3.47	±$6.94	±$0.66

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

ABT has paused as it tests the end of a decline from Aug. 3 to Sept. 13.

Multi-Asset Investing: A Practioner’s Framework by Pranay Gupta et al.

Zacks Investment Research rates the stock as bearish with no indication of an earnings surprise either way. The stock price has closed higher after three of the last four earnings announcements during what has been a year-long period of zig-zagging.

Brokerages are wildly optimistic about ABT, collectively coming down at a 40% enthusiasm rating, with two-thirds of 15 analysts issuing strong buy recommendations.

So it's a mixed picture, and I shall go with a direction neutral trade.

Iron condor, short the $43 calls and long the $44 calls,
short the $38 puts and long the $37 puts,
sold for a credit and expiring Nov. 19.
Probability of expiring out-of-the-money

NOV	Strike	OTM
Upper	43	75.1%
Lower	38	71.8%

The premium is $0.30, which is 30% of the width of the position’s wings. The risk/reward ratio is 2.3:1.

The zone of profit in the proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $3.76, and the average was $1.30. After eliminating the maximum and minimum post-earnings movements, the central tendency is $0.66.

Decision for My Account

It's a well-formed trade and I've entered a position as described above. The stock at the time of entry was priced at $41.75.

-- Tim Bovee, Portland, Oregon, Oct. 18, 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.

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Based on a work at www.timbovee.com.