Shares rose by 1.7% over 17 days, or a +37% annual rate. The options position produced a 100.0% yield on debit for a +2,147% annual rate
The digital gaming company Electronic Arts Inc. (EA), headquartered in Redwood City, California, publishes earnings on Tuesday after the closing bell.
[EA in Wikipedia]
EA
I shall use the DEC series of options, which trades for the last time 45 days hence, on Dec. 16.
Ranges
Implied volatility stands at 42%, which is 2.2 times the VIX, a measure of volatility of the S&P 500 index. EA’s volatility stands in the 90th percentile of its annual range. The price used for analysis was $78.12.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 89.55 | 100.98 | 82.74 |
| Lower | 66.69 | 55.26 | 73.51 |
| Gain/loss | ±$11.43 | ±$22.86 | ±$4.62 |
The Trade
Elliott wave analysis shows EA off the peak of a rise that began in August 2012. It could mark the beginning of a major correction as the long rise ends, but there may well be more upside to come.
by Doug Eberhardt |
Zacks Investment Research gives EA a bullish ranking with no indication of changing Street expectations that point to an upside earnings surprise.
Brokerages lean toward the optimistic side in viewing EA's prospects, as a group coming down with a 20% enthusiasm rating with 53% of 15 analysts issuing strong buy recommendations.
EA has risen twice immediately after the last four earnings announcements.
Much inconsistency surrounds EA. I shall hedge both ways with a direction neutral strategy.
short the $70 puts and long the $67.50 puts,
sold for a credit and expiring Dec. 17.
Probability of expiring out-of-the-money
| DEC | Strike | OTM |
|---|---|---|
| Upper | 85 | 78.3% |
| Lower | 70 | 76.0% |
The premium is $0.82, which is 33% of the width of the position’s wings.
The risk/reward ratio is 2.1:1.
The zone of profit in the proposed trade covers a $7.50 move either way. The biggest immediate move after each of the past four earnings announcements was $8.84, and the average was $4.98. After eliminating the maximum and minimum post-earnings movements, the central tendency is $4.62.
Decision for My Account
I've opened a position on EA as described above. The stock at the time of entry was priced at $77.97.
-- Tim Bovee, Portland, Oregon, Nov. 1, 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.
Alerts
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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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