Update 12/12/2016: TSN gapped downward sharply after earnings were published but in subsequent weeks recovered about half of the loss. I exited with a profit.
Shares declined by 6.5% over 24 days, or a -99% annual rate. The options position produced a 113.5% yield on debit for a +1,728% annual rate.
[TSN in Wikipedia]
I shall use the JAN series of options, which trades for the last time 63 days hence, on Jan. 20.
Implied volatility stands at 44%, which is 3.4 times the VIX, a measure of volatility of the S&P 500 index. TSN’s volatility stands in the 95th percentile of its annual range. The price used for analysis was $67.17.
Ranges implied by options and earnings
|Week||SD1 68.2%||SD2 95%||Earns|
Implied volatility 1 and 2 standard deviations; central tendency earns moveThe Trade
TSN peaked Sept. 5 and then reversed downward, ending a rise lasting nearly eight years. The Elliott wave count suggests that the present move to the downside is the beginning of a major correction, but it is not a certainty.
The price since September is in the fifth wave of its decline, suggesting that a reversal to the upside is near. Such a reversal would be a counter-trend correction, and I would expect it to stay well below the September peak.
Zacks Investment Research gives TSN a neutral rating, with some suggestion in recent analysts’ alterations of their assessments that a negative earnings surprise is expected.
TSN’s brokerage coverage is slim, but in aggregate they come down with a 33% enthusiasm rating, with two thirds of six analysts issuing strong buy recommendations.
The stock’s price has risen in the trading session after three of the last four earnings announcements.
I’ll construct a direction neutral trade skewed to the downside.
Iron condor, short the $72.50 calls and long the $75 calls,
short the $57.50 puts and long the $55 puts,
sold for a credit and expiring Jan. 21.
Probability of expiring out-of-the-money
The premium is $0.79, which is 32% of the width of the position’s wings.
The risk/reward ratio is 2.2:1.
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 $5.15, and the average was $3.26. After eliminating the maximum and minimum post-earnings movements, the central tendency is $3.73.
Decision for My Account
I have entered a position on TSM as described above. The stock at the time of entry was priced at $67.22.
— Tim Bovee, Portland, Oregon, Nov. 18, 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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