Shares rose by 5.9% over 39 days, or a +55% annual rate. The optons position produced a -58.3% loss on debit for a -546% annual rate.
The telecommunications company AT&T Inc. (T), headquartered in Dallas, Texas, publishes earnings on Tuesday after the closing bell.
[T in Wikipedia]
I shall use the DEC series of options, which trades for the last time 53 days hence, on Dec. 16.
Implied volatility stands at 19.3%, which is !1.5times the VIX, a measure of volatility of the S&P 500 index. T's volatility stands in the 55th percentile of its annual range. The price used for analysis was $36.80.
|Week||SD1 68.2%||SD2 95%||Earns|
The chart trend is sharply down and has been since July 1.
Zacks Investment Research gives T a neutral rating, but sees signs of a possible negative earnings surprise. However, Zacks negative earnings surprise methodology is not much better than a random walk, so I discount it.
Brokerages in aggregate gives T a neutral enthusiasm rating, with 48% of 21 analysts issuing strong-buy recommendations.
T's implied volatility is high because of a proposed merger with the video content giant Time Warner. So this is a combo play: I'm entering for the earnings announcement, and yet T is also reacting after major news.
I've gone with a neutral construction, but allowed for a larger zone of profit to the downside.
short the $34 puts and long the $33 puts,
sold for a credit and expiring Dec. 17.
Probability of expiring out-of-the-money
The premium is $0.30 which is 30% of the width of the position’s wings.
The risk/reward ratio is 2.5:1.
The zone of profit in the proposed trade covers a $1.20 move to the upside and a $2.80 move to the downside.
Decision for My Account
I have opened a position on T as described above. The stock at the time of entry was priced at $36.80..
-- Tim Bovee, Portland, Oregon, Oct. 24, 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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