Advance Auto Parts Inc. (AAP)
Update 6/1/2017: AAP’s earnings announcement after two straight gaps to the downside, and after the announcement gently retraced a small portion of the decline. On the chart, it’s appears traders were following Nathan Rothschild’s time-worn dictum, uttered in 1810 during the Napoleonic Wars: Buy on the sound of cannons, sell on the sound of trumpets. The trumpets in this case allowed me to exit at 28.4% of maximum potential profit.
Shares showed a net decline of 4.4% over nine days, or a -178% annual rate. The options position produced a 39.7% yield on debit for a +1,609% annual rate.
AAP publishes earnings on Wednesday before the opening bell.
I shall use the series of monthly options that trade for the last time 24 days hence, on June 16.
Implied volatility stands at 37%, which is 3.4 times the VIX, a measure of the volatility of the S&P 500 index.
AAP’s IV stands in the 77th percentile of its annual range and the 96th percentile of its most recent broad movement.
The price used for analysis was $142.05.
The premium is 35% of the width of the position’s wings.
The risk/reward ratio is 1.1:1.
Decision for My Account
I have entered an order on AAP as described above. The premium is a bit low compared to my normal preference, which is around 50% of the wing width. Nonethless, I don’t consider it to be a deal breaker. The stock at the time of entry was priced at $7.04.
By Tim Bovee, Portland, Oregon, May 23, 2017