Tuesday, November 15, 2016

LOW Analysis

Update 11/18/2016: LOW reached half of its potential profit and I exited.

Shares declined by 0.8% over three days, or a -92% annual rate. The options position produced a 100.0% yield on debit for a +12,166% annual rate

The home improvement retail chain Lowe's Companies Inc. (LOW), headquartered in Mooresville, North Carolina, publishes earnings on Wednesday before the opening bell.

[LOW in Wikipedia]


I shall use the DEC series of options, which trades for the last time 31 days hence, on Dec. 16.


Implied volatility stands at 32%, which is 2.3 times the VIX, a measure of volatility of the S&P 500 index. LOW’s volatility stands in the 62nd percentile of its annual range. The price used for analysis was 68.90.

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

LOW has declined sharply since ending its rise since 2009 with a peak in August. In Elliott wave terms, since August the stock appears to be a sideways 4th wave correction that, when complete, will be followed by a significant move to the upside. The timing of the move, as always, is a mystery.

Odds On: The Making of an Evidence-Based Investor
by Matt Hall

Since the August peak LOW has completed three waves in a five-wave downward movement. A bump up since Nov. 9 is the beginning of the 4th wave, which I presume will continue for a period measured in months. It is impossible to say now whether the 4th wave movement will be directional zig-zag or a sideways flat.

LOW's has a bearish rating from Zacks Investment Research. Any earnings surprise, by Zacks analysis, will likely be to the downside.

Brokerage opinions on balance are neutral toward LOW, coming down with a zero percent enthusiasm index, with 44% of 18 analysts issuing strong buy recommendations.

LOW has risen the next trading day after three of the last four earnings announcements.

I shall attempt a direction neutral position, using the iron condor options construction.

Iron condor, short the $75 calls and long the $72.50 calls,
short the $65 puts and long the $62.50 puts,
sold for a credit and expiring Dec. 17.
Probability of expiring out-of-the-money

The premium is $0.68, which is 27% of the width of the position’s wings.

The risk/reward ratio is 2.7:1.

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 $4.60, and the average was $2.30. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.94.

Decision for My Account

I have entered a position on LOW as described above. The stock at the time of entry was priced at $69.14.

-- Tim Bovee, Portland, Oregon, Nov. 15, 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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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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