Monday, October 24, 2016

T Analysis

Update 12/2/2016: T began rising in mid-November, moving beyond the profit zone, and dropped slightly after peaking on Nov. 29. I saw little directional chance of a further fall bck into the profit zone and I exited for a loss.

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.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

The Trade

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.

Iron condor, short the $38 calls and long the $39 calls,
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.
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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