LOW Analysis

Lowe’s Companies Inc. (LOW)

Update 5/25/2017: LOW gapped to the downside after earnings were published and then recovered about half of the loss. I exited at 43.9% of maximum potential profit.

Shares showed a net decline of 2.2% over two days, or a -401% annual rate. The options position produced a 78.3% yield on debit for a +14,296% annual rate.

LOW publishes earnings on Wednesday before the opening bell.

I shall use the series of monthly options that trade for the last time 10 days hence, on June 2.

Implied volatility stands at 27%, which is 2.5 times the VIX, a measure of the volatility of the S&P 500 index.

LOW’s IV stands in the 71st percentile of its annual range and the 77th percentile of its most recent broad movement.

The price used for analysis was $83.00.

Premium: $3.94 Expire OTM  
LOW-iron fly Strike Odds Delta
Long 91.00 92.8% 8
Break-even 86.94
Short 83.00 52.4% 50
Short 83.00 47.6% 50
Break-even 78.94
Long 75.00 92.2% 7

The premium is 49% of the width of the position’s wings.

The risk/reward ratio is 1:1.

Decision for My Account

I have entered an order on LOW as described above. I had mentioned the spotty liquidity as measured by open interest. In making a decision, I looked at liquidity through another metric: The bid/ask spread on the relevant strike prices. By that measure, LOW had sufficient liquidity to support a trade. The stock at the time of entry was priced at $3.94.

By Tim Bovee, Portland, Oregon, May 23, 2017

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