AAP Analysis

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.

Premium: $7.04 Expire OTM  
AAP-iron condor Strike Odds Delta
Long 165.00 89.0% 13
Break-even 152.04
Short 145.00 59.0% 45
Puts
Short 140.00 55.2% 41
Break-even 127.04
Long 120.00 87.3% 11

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

3 thoughts on “AAP Analysis

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