PANW Analysis

Palo Alto Networks Inc. (PANW)

Update 9/1/2017: My passing on PANW proved to be right decision. The price opened up $12.12 after earnings were published. The opening price, $144.81, was below the upper break-even boundary, but the price rose above it in the second five-minute period after the opening bell and continued to rise. At no point did the position reach my exit point, which is 25% of maximum potential profit.

So, taking the opening price of the second 5-minute period, $143.80, as my theoretical exit, here are the stats:

At exit the price was up $10.55 above the price at analysis, slightly greater than the expected movement. The post-earnings move was much narrower than PANW’s has been in the past, at a ratio of 0.5 of both the average and central tendency after that last four announcements, and 0.2 of the maximum.

Earnings exceed the consensus estimate of $0.81 by 11 cents, coming in at $0.92. Zacks earnings surprise predictor had suggested a very slight chance of a negative earnings surprise, with a -0.06 score. That proved not to be the case.

All in all, I think the figures suggested that I made the right decision in not taking the trade. The beta was my primary reason for making that decision, and I shall continue to use that indicator as a guide, seeking out low beta high implied volatility trades.

PANW publishes earnings on Thursday after the closing bell.

I shall use options that trade for the last time eight days hence, on Sept. 8.

Implied volatility stands at 48%, which is 4.5 times the VIX, a measure of the volatility of the S&P 500 index.

PANW’s IV stands in the 84th percentile of both its annual range and its most recent broad movement.

The price used for analysis was $133.25.

Premium: $11.10 Expire OTM  
PANW-iron fly Strike Odds Delta
Long 155.00 90.5% 12
Break-even 145.10 ~78.0% ~26
Short 134.00 53.3% 51
Short 134.00 46.7% 49
Break-even 124.10 ~71.0% ~25
Long 113.00 90.5% 8

The premium is 53% of the width of the position’s wings.

The risk/reward ratio is 0.9:1.

The zone of profit in the proposed trade covers a $21 move either way. The biggest immediate move after each of the past four earnings announcements was $36.69, and the average was $22.18. After eliminating the maximum and minimum post-earnings movements, the central tendency is $20.87.

The expected move covering 85% of occurrences is $10.18 within the $21.00 break-even width.

The bid/ask spread is 5.8%.

Decision for My Account

The zone of profit just barely covers the central tendency of movements after the preceding four earnings announcements, and is too narrow to cover all of the average or, certainly, the maximum.

Zacks Investment Research gives a earnings surprise predictor score of -0.06, small enough to not cause concern. The beta, at 1.08, is 8% more volatile than the S&P 500, a significant difference.

All in all, I see an enhanced risk that the price will move beyond one or the other of my break-even points. Add that to the poor coverage of ground covered after prior earnings announcements, and the risk seems quite great indeed.

I am, therefore, passing on the trade. I shall track the results and see if  my caution was justified, and update this analysis with my findings. The stock price at my hypothetical entry was $133.63.


By Tim Bovee, Portland, Oregon, Aug. 31, 2017


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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